Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Friday, March 4, 2011

The Ron Paul Thing

I've taken down my post entitled "Ron Paul's Money Illusion" because it seems to have provoked mindless rage rather than thoughtful debate.

A part of this is my fault for saying that, while I respected many of the Congressman's libertarian ideals, I thought that he could be more circumspect at times. Well, I didn't exactly use this language, if you know what I mean. And for that, I want to apologize to the Congressman and all of his ardent supporters.

Having said this, I stand by the substantive point that I was trying to make. That column, however, was written too hastily. So I think I'll rewrite it, this time a little more carefully, and with a little less colorful language (and maybe a little more data).

A good weekend to all.
DA

98 comments:

  1. It's a shame that you took it down.

    Libertarians are more than happy to admit that politicians in general are ignorant, interested only in getting re-elected, and that they tailor their public pronouncements on economic questions accordingly. Generally speaking, this analysis is sound.

    But whenver it gets applied to their own favorite politicians it's as if none of this applies. I thought you performed a great service by putting up that post. The words you used to address Paul where nowhere near as harsh as the words his supporters reserve for other politicians.

    Maybe repost it, but close the comment section?

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  2. Stiff business, getting called out for asking people to be a little more careful when they're speaking. Don't let the man get you down, dude.

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  3. David, I am trying to say this without being insulting, but I could write a book about what you don't know. Your frame of reference is like most of your contemporaries: (neo)Keynesian-neoclassical-econometric. As you know Mr. Paul is a student of Austrian theory economics, something that is often dismissed by the mainstream. I claim the same hertiage as Mr. Paul. Fortunately for me I'm not a politician. We see many criticisms of Austrian theory but 99.9% are from people who have no idea what it is and usually quote the same misinformation that other critics have written (Prof. Krugman, for example). I see that you sort of stepped into a mess here with your article. It is not exactly fair to criticize something which you have no knowledge of. After all many of us Austrian types were taught what you were taught (Samuelson, etc.) but didn't accept what was served to us. I can claim to have read JMK's General Theory, as well as research put out by the Fed. So I can say I "get" what you guys are saying, and I feel able to criticize it intelligently. It would be nice if you did the same. I read your article and just smiled because we Austrians see this stuff all the time. So, before you step into the fray again, perhaps you should read up on what it is that you are criticizing. I can recommend some excellent books on the topic. In fact, I would be happy to send you one, gratis, if you are so willing. At least then, if we disagree, we can intelligently debate the topic.

    Best wishes,
    Jeffrey Harding

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  4. Caught to much heat from us Ron Paul supporters, eh ?

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  5. dear central planner -you know which side your bread is buttered.get a real job really.

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  6. Dr. Andolfatto, I was going to write a (calm) critique of your post, but others made most of the important points. One thing that struck me was an apparent contradiction in your position: On the one hand, you were saying money neutrality proves that nobody in the public is getting taken to the cleaners by inflation.

    But then later in the article you admitted that the Fed/Treasury derive an income (admittedly not large compared to tax revenues) from seignorage. So how can that be?

    In your tamer post, it would be great if you could clarify. Thanks.

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  7. Daniel: I'll repost the same idea in a less provocative manner.

    Prof: I know that you do not share all of my views on this matter, so thanks for your support!

    Bob: In case I don't get to this point, let me address it now for you.

    There are, in fact, two underlying concepts here: neutrality and superneutrality (and each with a short-run and long-run dimension).

    Neutrality states that when you compare two economies with different money supplies (economy 1 is the US in 1913, and economy 2 is the US today), that the different money supplies have no real implications. The only difference one will observe (at least, to a first approximation) is a proportional difference in the general level of nominal prices (and wages).

    In the statements made by Ron Paul that I chose to critique, it is clear to me that he is suggesting that the large increase in the price level today (relative to 1913) has had a significant real effect. He is suggesting that the larger money supply makes nominal prices higher, but leaves nominal wages largely unchanged.I disagree with him, and I think most economists would too.

    Superneutrality is the proposition that real variables remain unaffected by the rate of growth of money.

    Theory and evidence is less supportive of money superneutrality.

    My own view is that inflation is generally a bad thing. But that its likely not worth getting worked up too much about inflation that is low and stable (essentially the current US regime). At least, its not worth getting worked up over when there are so many other pressing problems out there.

    I hope this goes some way to clarify. Thanks.

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  8. I am hoping that you address the issue that Dr. Paul really is making which is that, under your premise, savings of FRNs is not a viable method of storing value. Inflation causes the value to be transfered to others, without any exchange of value to warrant such a transfer.

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  9. The fact remains, your opinion is biased.

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  10. You have not answered Bob Murphy's question. Where does the income from seignorage come from? Does the Fed turn stones into bread?

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  11. When you resort to calling people names you lose your argument. You lost.

    The Fed has engaged in economic warfare against the middle class for nearly 100 years. It is time to end our 3rd central bank.

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  12. Anon @9:21 Who saves in the form of Federal Reserve Notes? Please get serious. What you say is true about a surprise inflation, of course. But inflation has been low and stable. The Fed is committed to keeping inflation low and stable in the future.

    Anon @9:29 You mean, in contrast to your own enlightened opinion, or that of Ron Paul, right?

    Durbo: Seigniorage is a tax. Seniorage revenue is the product of the tax rate times the tax base. The tax rate in this case is the inflation rate. The tax base is the real quantity of base money (Fed Reserve Notes).

    Because the inflation rate in recent times has run in the 3% range, the inflation tax rate is very low (relative to how high it has been in the past, and how high it is in other countries).

    Note that because a good chunk of USD are held by foreigners, they are effectively being taxed as well.

    But the total seigniorage revenue in the US is peanuts, relative to the amount that Ron Paul's Congress appropriates each year.

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  13. Sam: I should not have called him that name, you are right. But if you let that blind you to the logic of my critique, it is you who are lost.

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  14. Thanks David, it's "9:21".

    I understand your point regarding controlled inflation. But, sudden or not, across the board inflation (as opposed to supply driven price change) is not good. If you think so, wouldn't the equivalent would be for you to send me "2%" of your savings account every year? I think this is the misunderstanding that everyone, including Dr. Paul, must have.

    Sorry for the FRN reference, that perhaps gave you the wrong impression about me or my point. It certainly would be foolish to save any money these days with interest rates way below the opportunity cost of not consuming. Now if I only had a big warehouse to store the tangible goods that I have to buy now in order to avoid inflation, there would be no issue. Of course, I thought that was supposed to be the role of money.

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  15. I don't think David needs me to defend him, but nevertheless I believe I need to make a (more or less) blanket statement regarding researchers at the various Fed banks.

    I have read numerous articles by Fed researchers and they are all very careful, thoughtful people. From what I have seen they are chiefly empiricists with a monetarist/new monetarist view point. If there is any bias whatsoever, it is self-selection bias due to the paradigm of the school of thought in which the individuals were trained. There is no bias that says "we gotta defend the Fed!"

    Note I am speaking only of the researchers at the Feds, whose work is public. Regarding the governors and operators and whatnot, I cannot speak.

    So there is bias, like there is bias anywhere, but it is not the bias of trying to find ways of defending the Fed. It is the bias of one's own experience and point of view. No one is innocent of that.

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  16. Can you explain how elderly people on a fixed income have not been hurt by the devaluation of the dollar? Also, could you explain how there is no redistributive effects from money creation? Why wouldn't the people who get the new money first, before prices are bid higher, benefit at the expense of people who get the new money last or not at all?

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  17. so were all 20 times richer eh? sure doesn't feel like it.

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  18. Anon @12:29

    Personally, I think 0% inflation would be great, if we could get it. But that 2% is not the end of the world. What people do not seem to realize is that the "long run," the nominal interest rate is proportional to inflation. It is this "Fisher effect" that ultimately protects savers.

    Dan:

    Let me ask you this. Imagine that we had deflation, instead of inflation. Then you would no doubt say that those on fixed incomes would benefit. I, in constrast, would say that those on fixed incomes would see their incomes cut or taxed by some other method.

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  19. Anon @2:10PM>

    That part was said tongue-in-cheek. It is true that nominal incomes are hugely larger than they were 100 years ago. And it is true that inflation is responsible for most of this increase. So, if you want to blame the Fed for generating this inflation, then you have to give the Fed credit for generating the huge increase in nominal income.

    People mistakenly believe--because they are misled by Paul--that if there was no inflation over the last 100 years, their current nominal incomes would be just as they are today. This is just plain misleading and the point of my original post.

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  20. I was surprised when I read the article to learn that you are a Federal Reserve bureaucrat. You immediately resort to name calling by referring to Ron Paul as a pin-head.

    I suspect that your employer strongly suggested that you retract your article, as Ben Bernanke's PR effort to try and legitimize the Federal Reserve rolls on.

    I seriously doubt that you will allow this comment to appear on your blog. But, it would be refreshing to see if you can take criticism as readily as you dish it out.

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  21. So I take it you don't have an answer to my questions?

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  22. Anon @2:56 If you scroll through the history of this blog, you'll see that I do not remove even the most scathing comments hurled against me.

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  23. Sir, I can't take you seriously enough to debate.

    Let me give you an example of why I will not engage that you will perhaps understand.

    After you called Ron Paul a pinhead, you have responded to another reader like this:

    Sam: I should not have called him that name, you are right. But if you let that blind you to the logic of my critique, it is you who are lost.
    March 5, 2011 10:39 AM

    We are lost if your name calling blinds us to your logic? Give me a break.

    You are suggesting that we should look beyond your name calling and condescending response to engage with you in a scholarly debate.

    Perhaps the Fed should be abolished, starting with your job.

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  24. Dan:

    Let me answer your questions directly then, since you do not seem to understand what I was saying to you @ 2:26PM.

    Can you explain how elderly people on a fixed income have not been hurt by the devaluation of the dollar?

    They have not been hurt by the devaluation of the dollar. They have been hurt by their fixed incomes.

    Also, could you explain how there is no redistributive effects from money creation?

    You ask this question in a manner which suggests that I believe money is neutral in the short-run. If you read my academic papers, or my lecture notes, you will see that this is not so. It is also not the point of my blog post, which was trying (unsuccessfully) to emphasize long-run money neutrality.

    Why wouldn't the people who get the new money first, before prices are bid higher, benefit at the expense of people who get the new money last or not at all?

    Recipients of money transfers have wealth redistributed toward them. Did I suggest otherwise?

    One thing you do not realize, however, is that the Fed is legally prohibited from making money transfers; this is the job of Congress (and they do a lot of this). The Fed is limited to purchasing assets, typically Treasuries, but recently in the form of MBS too. There were also the short-term emergency lending facilities. Most of those loans have now been paid back with interest, which the Fed remits to the Treasury.

    I hope I have answered your questions to your satisfaction.

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  25. Anon @3:15PM Yes, I suggest you look beyond the comment and engage in a scholarly debate. You have a problem with that, evidently. Fine. You are free not to read or post.

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  26. We are the Fed. We set the rules. I get it.

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  27. But... if money neutrality is real, then deflation wouldn't be a bad thing either?

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  28. Ludwig von Mises elegantly showed that in reality money is not neutral: http://mises.org/daily/3808

    But putting it aside, Here is another question: If money is purely neutral, then why do we use it at all? Money permits exchanges to occur that would not happen at all under a system of barter, so it is not a neutral good.

    However, there is no overall benefit created when the government expands the amount of money in circulation. Instead, it creates conditions of real wealth transfers from savers to borrowers, and there is no bigger borrower in the world than the U.S. Government.

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  29. Exactly. Apparently, neither inflation or deflation are necessarily bad things in the artificial economies and markets constructed in the mind's of Fed bureaucrats such as David Andolfatto.

    All that matters in these "scholarly arguments" are the rules the Fed sets for the economic and political circumstances of the moment.

    Andolfatto's rules are designed at the pleasure of his benefactors, Congress and the large financial institutions that sponsor his employment at the Fed.

    This guy is all caught up in his knickers with contradictory logic. Free markets based on real money are not quite as difficult to understand.

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  30. michael: My claim had to do with long-run money neutrality. Deflation, or inflation, have to do with superneutrality. I do not think that money is superneutral.

    Anon @4:08

    You are correct that money is not neutral in that sense. In fact, the idea of monetary exchange expanding the set of trading opportunities is central to every modern theory of money (refer, for example, to Steve Williamson's blog).

    Having said that, money is still neutral (in the long run) in these models. These models possess that property because to a first-order approximation it seems to be true in the data as well.

    Yes, the U.S. government is a big debtor. It would too if there was no Fed. There is a huge world demand for US Treasury debt, in case you haven't noticed.

    Anon @4:24 Yes, you should stick to the non-scholarly arguments you seem to prefer. Oh, and my, we are brave when we hide behind the cloak of anonymity, aren't we?

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  31. David, I think you are getting rattled now.

    You realize that you were wrong to characterize Congressman Paul as a pinhead. You are now insulting the opinions of others.

    I think you realize that those of us who have commented are closer to the economic reality, in the context of free markets, than you are to the illogical argument that you present in the context of defending the Feds alternative reality.

    Yes, in your perfect world, everyone would have a salary that increases with real inflation as yours probable does.. (and, not inflation defined to exclude energy, food, and other necessities of life).

    You might want to take the rest of the night off. You will probably need some rest for that inevitable phone call from Ben on Monday morning.

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  32. Anon: Nope, not getting rattled at all. In fact, I'm about to head out and join a few buds for a beer and live music. I do thank you for your paternalistic concern though. You would have made a fine central planner.
    ;)

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  33. Have a nice evening Comrade Andolfatto

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  34. "They have not been hurt by the devaluation of the dollar. They have been hurt by their fixed incomes."

    They would not be hurt by their fixed incomes without the devaluation of the dollar. If you want to say the State will just take their savings with cuts and taxes that doesn't bolster your argument. At least through those means the people would know who to blame for the loss in purchasing power unlike the hidden inflation tax.

    "Recipients of money transfers have wealth redistributed toward them. Did I suggest otherwise?"

    If you acknowledge that when the fed increases the money supply that the first to receive the new money benefit at the expense of those who get it later or not at all, then I'm not sure I see your point from your original post.

    These people lose purchasing power before they see their wages increase. The devaluation of the dollar hurts the poor and elderly to the benefit of the politically connected that get their hands on the new money first. It also causes misallocation of resources and sets up another boom-bust cycle.

    "One thing you do not realize, however, is that the Fed is legally prohibited from making money transfers; this is the job of Congress (and they do a lot of this). The Fed is limited to purchasing assets, typically Treasuries, but recently in the form of MBS too. There were also the short-term emergency lending facilities. Most of those loans have now been paid back with interest, which the Fed remits to the Treasury."

    I do understand the operations of the Fed. I understand, for example, that when JP Morgan didn't want to buy up $30 billion worth of junk assets from Bear Stearns, the Fed just created a Maiden Lane and bought the junk for them to get the deal done.

    I understand that all the new Fed tools under Bernanke have created huge problems. We now have over $1 trillion in excess reserves because of the Fed paying interest on them. The Fed's balance sheet is now very sensitive to rises in interest rates. I know that interest rates will rise if the Fed stops buying treasuries in June. That QE2 poured a lot of new money into the economy at the end of 2010 which is driving prices higher and since the new year most of the new money is ending up in excess reserves. This is setting the economy up for stagflation.

    "Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher)."

    What happens if my pay increases slower than other prices? If I lose my savings while I'm waiting to get to the higher wages then I'm getting ripped off through inflation.

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  35. Thanks for all the responses David, it's been an interesting read

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  36. HAHA, classic. What arrogance...but that is to be expected from someone at the Fed. Look at the arrogance of Bernanke during his recent testimony. Keep up the "good" work. In your rant against Ron Paul you cherry picked a few items and tried to rationalize them without actually addressing the root cause of the problem - the Fed. Boom/Bust cycles, a continual welfae/warfare state, inflation, a $14 TRILLION + national debt. How can you ever justify that?

    "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." - Alan Greenspan

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  37. http://www.youtube.com/watch?v=pc0mxOXbWIU

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  38. Wow David, you get called out for being deceitful and then you turn around and post another lie. The post that are found at http://wallstreetpit.com/64990-ron-pauls-money-illusion#comment-538838 are thoughtful and based on facts. You chose to hide under your desk till I called you out on the Wall Street Pit post. Then you made the excuse that you didn't know a debate had begun regarding your Ron Paul smear. When you did make an appearance, you didn't stay long and you left many unanswered questions.

    I encourage you to go back to the post and address your fans.

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  39. David,

    You say you "chuckle whenever he (Paul) berates the Fed for creating money “out of thin air”"

    Do you chuckle in Bernanke's face when he speaks of "printing money"?

    http://www.thedailyshow.com/watch/tue-december-7-2010/the-big-bank-theory

    You may "chuckle" when Paul speaks the truth, but the rest of American is having a good "chuckle" at the expense of THE FED.

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  40. "No one saves by sticking money under the mattress"
    I keep reading how logical (and scholarly!) you believe your arguments to be. Yet you respond to criticism with comments like the one above. First of all, you cannot have this knowledge as you are not omniscient. Secondly, and more importantly, did it ever occur to you that few people save that way because they know that their money will not purchase the same amount of goods in the future? This is circular reasoning on your part. You are claiming that the cause doesn't matter because the effect exists. This is not the only evidence of a lack
    of logical thought on your part but it is the most glaring I have yet read. I may yet comment on the others but I would like to see your response. Also, I need to get to bed. Goodnight

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  41. Hi, DA.
    I said something about your blog stats dancing.
    You said something about Icarus.

    You were right.
    Art.

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  42. david you are no more than a criminal harboring financial terrorist.the fed was created by special interest and you harbor this cartel.You can say all you want but at this point no one is listening to this b.s.You are traitor to american values and should be tried under the old act for devaluing the currency.
    a-hole

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  43. Dan:

    Let me address a couple of your points.

    If you acknowledge that when the fed increases the money supply that the first to receive the new money benefit at the expense of those who get it later or not at all, then I'm not sure I see your point from your original post.

    The statement above would apply also to a free-banking regime, would it not? A private bank creates new money and someone will be the initial recipient. So what's your point?

    What happens if my pay increases slower than other prices? If I lose my savings while I'm waiting to get to the higher wages then I'm getting ripped off through inflation.

    Look, I'm no fan of inflation. But inflation in the US is low and stable. Do you relly believe that inflation is the main problem in the US? The inflation tax is tiny, relative to the taxes imposed on US citizens by Congress. Paul is barking up the wrong tree.

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  44. Anon @7:51PM Thanks!

    Anon @12:06AM

    Do you chuckle in Bernanke's face when he speaks of "printing money"?

    I have to admit that I did chuckle at that. Not to Mr. Bernanke's face, however. I have never met the man. I suspect that if he had the chance, he might like the opportunity to rephrase what he said.

    The Arthurian: Ha ha, yeah...thanks for the reminder!

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  45. levi:

    I find it rather amusing that you are calling me the coward from behind your cloak of anonmymity. If people have questions to ask, they know where to reach me.

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  46. David, your answers to Jimmy display a profound and deep ignorance about the nature of inflation and the connection between short and long term effects.

    You casually and almost inconsequentially gloss over the fact that inflation has “short term” wealth transfer effects. You admit that it does, but then you say “in the long run”, money is neutral. Well sure, if inflation in the real world consisted of the Fed inflating the money supply for ONE TIME ONLY, and then no more inflation of the money supply thereafter, then sure, the short term wealth transfer effects will be attenuated, and the long run effect will be to increase prices and nominal incomes.

    But here’s the rub: The Fed CONSTANTLY inflates the money supply over time, which means the long term effects you are talking about are overwhelmed by the constant short term effects that actually take place. Yes, the money used in a given round of Treasury purchases will eventually be spread out into the economy, raising prices and incomes, but no sooner will the effects of that be made, the Fed will have already inflated the money supply once more, which means there is ALWAYS short term wealth transfer effects taking place, which means in the long run, there will have been a constant stream of wealth transfer from those who typically get the new money last (those on fixed incomes, widowers, pensioners, etc) to those who receive the new money first (Wall Street primary dealers, the Treasury, etc).

    Ron Paul was not talking about the long term effects of a single round of inflation, which is, as you said, “neutral.” He knows that inflation is NEVER one time only. The Fed continually creates and then injects new money into specific parts of the economy all the time, and that means the short run effects of inflation (wealth transfer) completely and totally overwhelm the long term effects of way in the past inflation, which has percolated through the economy yes, but by that time, more wealth transfer has taken place because of the continuous inflation from the Fed.

    So if you take the inflation the Fed has continuously created since 1913, then there has been almost 100 years of wealth transfer. THAT is what he means when he said that the Fed has taken 95% of the purchasing power of money.

    You are suffering from the illusion that inflation is not always affecting the economy in the short run, which is just another way of saying it affects the economy in the long run. You mistakenly believe that because a narrow focus on a particular round of inflation, and following those given dollars, will be neutral in the long run, as they spread throughout the economy, increasing prices and incomes, then somehow that means inflation in general is also neutral over the long term. Nothing could be further from the truth.

    What is true is that the constant short term wealth transfer effects taking place because of continuous Fed inflation, is equivalent to wealth transfer taking place in the long term. Only if the Fed inflated the money supply ONCE, say in 1913, and then didn't inflate any more after that, can you claim in 2011 that the inflation has been "neutral".

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  47. Oh, and if you don't want to be verbally attacked, then it would behoove you not to verbally attack others. You are complaining about being called names after you called Ron Paul a pinhead?

    Do as you say but not as you do?

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  48. David,

    The Federal Reserve System is in big trouble. Do you know how I know this? Because average people with minimal formal training in economics are making a complete mockery of the BEST points Fed cheerleaders, like yourself, are making. I just read the comments section of the article, and I laughed at how easily some of Ron Paul's supporters completely dismantled any argument you made in favor of the Fed. If you can't even defeat an average libertarian in a monetary policy debate, how are you going to take on the top Austrian economists? You, sir, are in way over your head.

    As a side-note, I noticed that in one of your comments you said that you are not permitted to vote in the United States, but you work for the Federal Reserve and have a hand in the manipulation of our nation's money supply. This is extremely disturbing to me.

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  49. I posted this last night at around 2:26, but it was no longer there when I checked just now. This response of yours regarding one reason why inflation doesn't matter is from the wall street pit - http://wallstreetpit.com/64990-ron-pauls-money-illusion. Here is my comment again:

    "No one saves by sticking money under the mattress"
    I keep reading how logical (and scholarly!) you believe your arguments to be. Yet you respond to criticism with comments like the one above. First of all, you cannot have this knowledge as you are not omniscient. Secondly, and more importantly, did it ever occur to you that few people save that way because they know that their money will not purchase the same amount of goods in the future? This is circular reasoning on your part. You are claiming that the cause doesn't matter because the effect exists. This is not the only evidence of a lack of logical thought on your part but it is the most glaring I have yet read. I may yet comment on the others but I would like to see your response. Also, I need to get to bed. Goodnight.

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  50. David you completely bailed on your readers on Wall Street Pit. Don't post positions you can't/won't defend intellectually as the posters did on Wall Street Pit. All your readers here have to do is go to the site and your headline will be exposed as the lie it is.

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  51. Captain Freedom:

    I find it implausible that a regime of low and stable inflation has a first-order effect on wealth distribution. The inflation tax in the US is small potatoes. The real tax burden comes from the direct taxes imposed on the population by Congress. Do you deny this? Do you believe that this tax burden would be any less if the Fed did not exist? If you believe this, then you are naive.

    Oh, and I do not recall complaining about being verbally attacked. What are you talking about?

    Mark Lundgren: I just performed a Google search of your name and contributions to monetary theory. I came up empty. Perhaps you'd be kind enough to send me a sample of your work?

    Nothing Personal: I have no obligation to defend what I said on every website that posts my blog piece. There is not enough time in the day to do that. I will answer question here though. And then spend some time with kids.

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  52. Hey David, I feel bad you had to have your blog comments hijacked by the crazies. It's quite commendable that you keep responding even though it doesn't seem like anyone really wants to learn, only to "win" the argument. I really enjoy the blog and hope you keep it up.

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  53. If you want thoughtful debate, you don't start out by calling someone a "pinhead".

    And your comment like:
    "Mark Lundgren: I just performed a Google search of your name and contributions to monetary theory. I came up empty. Perhaps you'd be kind enough to send me a sample of your work?"

    shows you are just like your colleague in Richmond Fed, who trashed anyone who dare comment on the economy or the finance without having a PhD in economics.

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  54. I second Andrew's sentiment.

    While I follow Austrian economics, I find many of the points made here to not be thoroughly backed by economics, Austrian or otherwise.

    There is a long literature discussing the costs of low positive inflation, versus zero inflation, versus a productivity norm. No one has raised these issues. We are not talking about Zimbabwe or Weimar Germany. We also are not talking about the origins of the Fed, no matter how shady or misguided. We are talking about non-neutral money and where the effects of money inflation can show up.

    These issues are deeply complex and the empirical studies are mostly done by non-Austrians. Austrian economists have a lot of catching up to do with the data analysis because that wasn't it's historical nature. Some individuals are doing this, but it's going to take a long time to develop the empirical side of things.

    It must be clearly understood that there are many schools of thought and they agree on most things. But there remain many pockets of disagreement. It is the business of careful, thoughtful people to explore the areas of disagreement and come to understand the world more fully. There is no service to be found in throwing insults or calling another's work bad simply because their economic paradigm differs. The merits of the case must be studied. In many situations, this requires getting down to the barest definitions before proceeding.

    Calm, rational discussion is required from both sides. And to those who oppose the Fed: I theoretically am against any monopoly, including one on currency. But right now, central banking and its incumbent problems are likely a first-best solution in a second-best world.

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  55. Are you blocking my posts now David?

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  56. Prof J,

    Calm rational discussion was lost the moment David started the name-calling. He has perpetuated it in may of his replies to commentators.

    If central banking is a first best solution in a second best world, then perhaps we should consider why we live in a second best world

    I offer you the idea that the first best world existed when the framers of the Constitution tried to prevent the kind of world that the Fed has created.

    David is a Canadian who has received an economic education in the British Keynesian tradition. He is simply an expert in that classical rulebook.

    The cloak of academic superiority that David wants to hide behind needs to be stripped from him, and is being done so quite nicely in the comments section of his blog.

    The fallacies that David is promoting are simply at that point that the Keynesian rule book fails and creates the second best world that you see around you.

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  57. Andrew: Thanks dude, much appreciated.

    Anon @1:44 Yes, thank you for that advice. You are right that it is the wrong way to go. But live and learn. Not sure what the rest of what you write means. Perhaps your pants are on too tight this afternoon?

    Prof J: A valiant attempt, my friend. And from someone with whom I frequently disagree with. A model academic, in other words. But there is no sense in you wading in here. People apparently believe they can win a debate by angry words rather than logical thoughts.

    Anon @2:03PM Now that's not a very nice tone to take, is it? I am not blocking anyone. If you have problems posting at times, it's likely a temporary glitch. If posting fails altogether, just send me an email, and I will post for you.

    Anon @2:57PM You obviously have no idea what you're talking about. It would have been easy for you to do some research before posting. You could have discovered my supervisory committee, my thesis, my published papers. You could even have visited the posts I have made on this site critiquing Keynesian polices. But you chose to do none of that. And yet, you are somehow so certain of yourself. Amazing.

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  58. You sir, obviously have no idea what you are talking about. You are intellectually vacant. Criticizing Keynesian policies doesn't stop you from utilizing them as you serve your masters at the Fed. You are simply as we say, among the great unwashed masses, an educated idiot.

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  59. Andrew Jackson put Nicholas Biddle out of business. I look forward to Ron Paul putting David Andolfatto out of business for participating in theft-by-inflation and counterfeiting.

    Federal Reserve Notes are backed by nothing except fraudulent accounting entries.

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  60. David,

    While we may not agree on Dr. Paul, you should have kept the post up. Be yourself, and don't worry too much about what other people think. Clarify and correct your mistakes, but don't obscess over offending people. Hell, think of the responses Krugman gets.

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  61. I find it implausible that a regime of low and stable inflation has a first-order effect on wealth distribution.

    You find implausible because you refuse to identify it.

    If ANY economic actor creates money out of thin air, then money will be spent, and hence real wealth (goods, services) will travel the opposite direction (and become the property of those who spend the money). This new money that is spent by economic actors was not earned by those actors in production.

    It is the exact same in principle as you or I having a money printing press in our basement, and we print off new paper money, then we spend it by either giving it to others, or buying goods from others, or buying government bonds, or whatever. That new money is not earned, it is simply introduced.

    For those on fixed incomes, they experience this additional money as an increased demand from those who did not produce anything, which means increased prices. Imagine me having a money printing press in my basement, and I print off my own money, then I demand the same goods as you. My increased demand will result in rising prices, and yet your income did not rise yet because your income is a function of the older and smaller supply of money.

    Over time, because I am continually printing off new money, I can continually increase my demand for goods and services without putting any real wealth back into the economy. Thus, real wealth will be transferred from you to me, as I print off money and I keep buying goods.

    >The inflation tax in the US is small potatoes.

    Now you're just rationalizing the wealth transfer by claiming that it is "small". So you admit that there IS a wealth transfer, and you admit that people ARE taxed by inflation. That contradicts your claim that inflation is "neutral."

    >The real tax burden comes from the direct taxes imposed on the population by Congress.

    Is that a hand waving I am observing?

    Listen David, the Fed has created over $2 trillion since 2008. That is money that has been created out of thin air and given to special interest groups around the country. Those who did not receive any of that new money in the initial stages (everyone but Wall Street and foreign central banks), are competing with economic actors who received newly created money but did not produce anything to earn it. That results in wealth transfer.

    >Do you deny this?

    Do you deny that inflation results in wealth transfer, and is greater the larger the inflation of the money supply?

    >Do you believe that this tax burden would be any less if the Fed did not exist? If you believe this, then you are naive.

    Hey, nice rhetorical straw man. Stop evading the argument. I am not claiming the inflation tax is greater or less than direct taxation. I am only talking about the effects of inflation, which you seem to be doing everything you can to deny and ignore.

    >Oh, and I do not recall complaining about being verbally attacked. What are you talking about?

    Wow, evading and ignoring seems to be your M.O.

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  62. @Captain Freedom - I see you engaging in legitimate dialectic, going point by point. I see David fighting those point on wealth transfer, you winning the argument, then David conceding the point by saying it doesn't matter anyway because it's minimal. This seems to be the tactic I most often see from defenders of the central bank. Evade until you get frustrated, and then accuse you of spouting angry invective. See Andrew calling debaters "crazies" looking to "win" the argument. Perhaps some of us did get frustrated watching the evasion, but the point of dialectic as
    the Captain is exercising it is to find truth, wherever it leads.

    @David - I assure you that to those who are risk-averse who lose wealth against inflation that the losses are nothing less than severe. There is no moral or legal justification for this hidden tax. Would such a tax (say 3.5% of total dollar-denominated wealth per annum) be accepted by the voters? If so, make it a direct tax. If not, don't think hiding it behind a specific money system makes it right.

    Most people do not

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  63. Early in my academic career, I was very interested in Austrian economics and would probably say that I was a "sympathizer," in the sense that I didn't agree with everything that the School asserted, although I did agree with the broad thrust of their arguments.

    However, as I matured in my economic education, I found certain Austrian positions less and less defensible, especially because they often reflected a lack of nuance. For example, in the debate here, there hasn't always been a clear distinction between the short and long run, correlation and causation, and between nominal levels and rates. As a consequence, claims are made that would be legitimate at face value, but once you think through the logic of the argument, you realize that the critique is misapplied.

    Lest I be accused of weaseling, I'll illustrate with one specific example that doesn't target any of the previous posters. The Misesian argument that money is non-neutral is actually more an argument against superneutrality (since the "stability of purchasing power" would be affected by constantly changing human action only when there is a constantly changing money supply, rather than a one-shot increase, save the initial redistributive effect on impact). Now, accepting Mises' argument does not then mean that one rejects neurality: after all, if governments could reap significant seigniorage revenue without hyperinflationary consequences, we might observe, say, at a government out that that just quadruples their money supply in one shot every 10 years (as opposed to slowly inflating at an annual rate). Accepting this argument also means that one may object to a monetary authority attempting to "tweak" the money supply via discretionary policy, but it says nothing about a policy of inflation targeting (assuming that it could be achieved, more or less). Think about it: how does a universally known, stable 2 percent inflation rate affect human action more as compared to a 0 percent rate, since agents can always factor in a definite fixed inflation rate into their plans?

    There have been many times when I have not agreed with your position, David, but they have always been though-provoking and, at the very least, forced me to question my assumptions and identify the specific point(s) of disagreement. Unfortunately, it seems that you have started an argument with others where their deeply-cherished beliefs sometimes gets in the way of careful evaluation of an argument, and one that has perhaps generated more heat than light.

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  64. Captain Freedom:

    The first part of your post deals with the mechanics of seigniorage. You correctly point out that any actor that is in the business of creating money has the ability to collect some seigniorage. This would include those actors that free-banking types would like to see replace the Fed. The reply to this would be that competition among money suppliers would keep this seigniorage to a minimum. And people will generally be better off; at least, if one assumes that Congress does not seek to replace this tiny bit of revenue with some other hidden tax (like a tax on intermediate goods).

    Your concern for people on "fixed" incomes is commendable. However, the problem here is not the 2% inflation; it is that their incomes are fixed. One solution would be a COLA clause that indexes nominal incomes to inflation. In fact, COLA clauses are common in high inflation environments.

    The wealth transfers that occur from an unanticipated inflation can be significant. But I do not believe that wealth transfers are very large at low and stable (i.e., expected) inflation rates, such as those currently prevailing in the U.S.

    I did not claim that "inflation is neutral." You should bone up on your terminology before accusing me of contradictory statements. I said that money is neutral in the long run. That is, if we compare the stock of money in the US today to the stock of money in the US 100 years ago, to a first-order approximation, the much larger stock today is largely reflected in nominal wages and prices.

    The statement that money is superneutral asserts that inflation (the rate of change in the price-level, as opposed to the price-level itself) has no real consequences. I did not make that claim, though I admit that the language in my post could have been more precise.

    No, that is not hand-waving. It is central to my argument. A 2% inflation tax is peanuts relative to the appropriations made by Congress. What justifies all the anger at the Fed, when it is Congress that is doing the vast majority of the taxing?

    Btw, I am not trying to justify the inflation tax. I'm just saying that there are bigger fish to fry out there. And that energy should be redirected to those bigger fish.

    Listen David, the Fed has created over $2 trillion since 2008. That is money that has been created out of thin air and given to special interest groups around the country.

    No, you listen for a change. You are wrong. The vast bulk of that money has been used to purchase US treasury debt and MBS. It is a swap of assets. Both asset classes are generating interest income for the Fed, which it remits to the Treasury as stipulated by the rules laid out by Congress. All of this information is publicly available. If you wish to dispute it, please present your data; I am not interested in your opinion or suspicions.

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  65. No, you listen for a change. You are wrong. The vast bulk of that money has been used to purchase US treasury debt and MBS. It is a swap of assets. Both asset classes are generating interest income for the Fed, which it remits to the Treasury as stipulated by the rules laid out by Congress. All of this information is publicly available. If you wish to dispute it, please present your data; I am not interested in your opinion or suspicions.

    True, but all of that purchased US Treasury debt was then used to do what exactly? When the Fed purchases Treasuries, the money paid for the paper makes its way to various federal agencies that use it to pay for current spending, most of which is transfers to politically-connected actors and their interest groups. Try cutting Social Security or Medicare and see what the AARP has to say about it. The same goes for suggesting that there's waste in the DOD's purchasing process, let alone that forces should be cut or bases closed.

    So I can see how from your perspective, all the Fed is doing is exchanging one asset for another; money for a financial instrument. But that money that you spend for the asset you receive goes somewhere for a specific purpose that, frankly, we all know.

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  66. Nate:

    Your posts are like a breath of fresh air; thanks.

    You are correct. The Fed "monetized" the Treasury debt. The Paul hypothesis is that this act facilitates government spending. But really, there is a huge world appetite for US Treasury debt. I doubt that the Treasury would have had much problem disposing it on world markets, perhaps at a slight discount relative to the Fed's offer price. (This is, however, conjecture on my part.)

    There are many people who believe that we are (or at least, were) in some sort of liquidity trap. Swapping zero interest cash for zero interest Treasuries isn't going to have any effect at all (or swapping interest bearing reserves for low-interest Treasuries).

    Then there are those who believe that something had to be done, because inflation and inflation expectations were falling well below target. (See: http://andolfatto.blogspot.com/2011/03/us-inflation-and-inflation-expectations.html)
    The fear here was that the US might enter into a Japanese style "deflation trap."

    And then there were those who, like Ron Paul, were concerned about the poor and disadvantaged. People like Christina Romer, arguing that the Fed should have been much more aggressive in its asset purchases, to keep interest rates low, to stimulate job growth, and lower the unemployment rate.

    All of these different viewpoints certainly make for an interesting conversation.

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  67. David, You comments indicate that you are a person concerned for your reputation for integrity. Given the long-hidden history of the clandestine manner of the Fed's creation, (http://www.businessinsider.com/fed-jekyll-island-club-2010-11) I feel the only way those who are associated with the Federal Reserve can hope to restore their integrity is by resigning their employment.

    In the concluding sentence of your original post, you took a backhanded slap at Ron Paul's integrity on the basis of him being a politician. Fair enough, for as a class politicians are indeed virtually bereft of integrity, but that charge coming from a bureaucrat, whose group integrity is even lower, is hilarious.

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  68. In addition to what has been said regarding inflation transferring wealth from some people to a favored few, the Fed's manipulation of interest rates certainly has the same effect. The currently imposed low interest rates have served to transfer vast sums of money from retirees who live on income from their lifelong savings to banks that have been enjoying remarkably good profits as a result of those low rates.

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  69. David,
    You ask for scholarly and logical responses to your postulates, yet your reasoning is often circular in nature. Eg., you responded to a criticism of inflation at the wall st pit by saying "No one saves by sticking money under the mattress." This cannot be a reason that inflation (in either the short or long-run) doesn't actually hurt anyone. Did it occur to you that the reason that few people save money in that manner is that they know that their money will not buy the same amount of goods in the future? You are essentially claiming that the cause doesn't matter BECAUSE the effect exists. You also cannot claim 'no one' saves that way, as that is not knowledge that you can possess. This is the kind of hubris that I would expect from a central planner, but it certainly doesn't have anything to do with logic.

    Ray

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  70. @David

    Thanks. I know we may not agree on everything, but I relish the chance to debate someone such as yourself. It's not often that you get to personally debate someone so close to the levers of power that you believe shouldn't be pulled and really oughtn't exist to begin with :)

    It seems that your position that domestic deficit spending is actually an international necessary due to the worldwide demand for the treasuries that the public debt is denominated in, which I won't and can't deny, unfortunately (although I'm tempted to speculate that in the absence of gazillions of treasuries, another "safe" investment would be found or created to satisfy that demand). But the two are not connected in lockstep; the worldwide demand for treasuries may not be as high as the amount of treasuries bought to fund the deficit, and we can ascertain this by looking at the composition of the public debt (word doc link). About 40% of it is in the form of treasuries owned by the Fed itself, not foreign countries! Doesn't this signal to you that the supply of treasuries exceeds the worldwide demand, and that the Fed is itself accommodating the supply by buying up all the excess treasuries that nobody else in the world wants? Or am I misreading the data?

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  71. Ned:

    While it is true that any monetary policy is likely to entail wealth transfers, it is my belief that the size of these transfers, say, in relation to total government taxation, or in relation to the GDP, is miniscule.

    Admitting that, however, does not justify the practice. But as I have repeatedly said, you are barking up the wrong tree if you are concerned about government agencies responsible for the transfer of wealth. For that, I recommend that you take a look at the size of Congressional appropriations. You know...Congress. That's where Ron Paul works.

    The other thing I have to say about this "low interest rates robbing the return on savings to seniors" is that the Fed has no mandate to protect any one group of society. The Fed must place weight on all members of society. And that includes poor unemployed young people, or cash-strapped businesses that desire lower interest rates to help stimulate employment and investment. (Personally, I do not think that the policy works that well, but that is a separate issue).

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  72. Interesting debate. I can forgive the pinhead comment and I'm a huge Ron Paul supporter.

    I do give David credit for at least responding to critics here. I am, and will, stay on the Austrian side of the fence and would like to see the FED slowly fade away and never return.

    Sure, it would be rocky at first, but we would get through it and be better for it.

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  73. Anon @10:04AM

    I'm sorry if you think that a response of mine is circular. I am struggling to understand your point. Let's see if we can make some progress here.

    Many people claim that inflation erodes the purchasing power of savings.

    Let us agree that this is true, under the proviso that saving is in the form of zero-interest bearing cash.

    And yes, let us both agree that with positive inflation, people do not have an incentive to save in this manner.

    But then, if you grant me that, you must grant that people are likely not saving in the form of cash (though you are correct that we have no direct observation)?

    History shows (again, over the proverbial long-run) that nominal interest rates largely reflect inflation (more properly, inflation expectations). The evidence is particularly clear in cross-country observations.

    So, to a first approximation, I think that the return to savings is largely linked to inflation expectations.

    Keep in mind that interest rates are prices that reflect all sorts of factors, not just expected inflation. And so low interest rates might be the product (as some people argue) of forces beyond the Fed's control (like the huge demand for US Treasuries coming out of China).

    You are essentially claiming that the cause doesn't matter BECAUSE the effect exists.

    I'm afraid I do not understand this. Would you care to elaborate?

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  74. Nate: I received a gmail indicating that you left a new comment here. Unfortunately, it does not seem to have appeared. This happens once in a while and I'm not sure why. Would you mind taking the trouble to repost it? (Or, if you would rather, send me an email directly). Thanks. And sorry about this.

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  75. Part 1

    The statement that money is superneutral asserts that inflation (the rate of change in the price-level, as opposed to the price-level itself) has no real consequences. I did not make that claim, though I admit that the language in my post could have been more precise.

    The statement that money is superneutral is irrelevant to the statement that money is not neutral in the short term, and because inflation is almost always taking place, the effects are not neutral in the long term.

    No, that is not hand-waving. It is central to my argument. A 2% inflation tax is peanuts relative to the appropriations made by Congress.

    Excuse me, but the $9 trillion the Fed has created and then given or lent to special interest groups is small potatoes compared to the $700 billion stimulus package Congress passed.

    And inflation is not 2%. Inflation is on average 4-5% for the CPI, if the government used the same method they used in the past before they made changes that reduced the rate of reported inflation. Furthermore, the fact that reported inflation for consumer goods is 2% does not mean that all individuals in the economy are taxed 2%. It means that prices for consumer prices have risen by on average 2%, which means the profits of the consumer goods companies that sell those consumer goods have risen by 2%, which means those whose incomes have not risen have to pay 2% more for those goods.

    It does not take into account stock prices, bond prices, capital goods prices, or any of the things that inflation affects greater than 2% if consumer prices rise by 2%. Housing prices could rise by 20%, stocks by 30%, bonds by 10%, and consumer prices can rise by 2%, and some things may even fall in price.

    What justifies all the anger at the Fed, when it is Congress that is doing the vast majority of the taxing?

    What justifies all the defense of the Fed, when it is the Fed that is responsible for the business cycle, and the millions of people unemployed?

    Btw, I am not trying to justify the inflation tax. I'm just saying that there are bigger fish to fry out there. And that energy should be redirected to those bigger fish.

    No, it should be directed at the Fed, because the Fed IS the big fish. It can, and has, created more money out of thin air than Congress can vote to spend.

    The Fed caused the economic collapse. Congress taxing and spending doesn't cause the business cycle, nor the millions who are unemployed. Congress doesn't create money out of thin air. Congress' huge debt and deficits are only able to be financed because of the Fed.

    No, you listen for a change. You are wrong. The vast bulk of that money has been used to purchase US treasury debt and MBS.

    FROM THE BANKS, DAVID. YOU are wrong.

    It is a swap of assets. Both asset classes are generating interest income for the Fed, which it remits to the Treasury as stipulated by the rules laid out by Congress.

    Hahahaha, and you are complaining that the Treasury is the problem, when the Fed gives it free money?

    All of this information is publicly available. If you wish to dispute it, please present your data; I am not interested in your opinion or suspicions.

    Ah, so more straw men is your only recourse.

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  76. Part 2

    But I do not believe that wealth transfers are very large at low and stable (i.e., expected) inflation rates, such as those currently prevailing in the U.S.

    Because they are not Zimbabwe large, is that it? Is this how you would defend murder? "I do not believe that murder is very problematic at low and stable (i.e. expected) rates, such as those currently prevailing in the institution I defend that murders people."

    Wealth transfers due to inflation are absolutely enormous in the US. By some estimates, over $9 trillion has been printed or lent to various special interest groups by the Fed in the last two years alone. That money represents a huge portion of the total incomes earned in the economy due to actual production. The Fed did not give that new money to everyone. It gave that new money only to a select group of people. The Fed has given at least $2 trillion to major financial institutions in the US, enabling them to increase demand for means of production, and thus outbid other investors who did not initially receive any of that new money.

    If the Fed created new money and gave some to everyone according to their income, then inflation as a policy would become empty and vacuous, since all that will happen is that extra zeroes would be added to all prices, revenues and costs. Inflation only "works" when there is seigniorage.


    I did not claim that "inflation is neutral." You should bone up on your terminology before accusing me of contradictory statements. I said that money is neutral in the long run.

    You should bone up on what that actually means before you shoot your mouth off on the alleged long term effects of inflation.

    I argued that "neutral in the long run" inflation is overwhelmed by the constant "wealth transfer in the short run" inflation.

    Since inflation keeps taking place in the short run, the de facto long term effect is constant wealth transfer, constant distortions of capital structure and labor allocation that are not due to real consumer demand for goods over time, but due to the monetary manipulations from the Fed.


    That is, if we compare the stock of money in the US today to the stock of money in the US 100 years ago, to a first-order approximation, the much larger stock today is largely reflected in nominal wages and prices.

    And in the massive increase in government activity relative to private activity, and in the size of banking relative to other industries, and in the psychological effect of American businessmen who have become more myopic and more focused on short run, next quarter profits, over future oriented, longer term profits, and in the increasing central planning power the Fed has over the economy, and in the size of government deficits and debt, and in the capital consumption that has taken place because inflation leads people to believe that they are richer than they really are, and in the threat to the monetary system in general.

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  77. Part 3




    The first part of your post deals with the mechanics of seigniorage. You correctly point out that any actor that is in the business of creating money has the ability to collect some seigniorage. This would include those actors that free-banking types would like to see replace the Fed.

    Sure, which is why I also reject banks expanding credit out of thin air even without a central bank to bail them out.

    The reply to this would be that competition among money suppliers would keep this seigniorage to a minimum. And people will generally be better off; at least, if one assumes that Congress does not seek to replace this tiny bit of revenue with some other hidden tax (like a tax on intermediate goods).

    How about a reply to my actual argument concerning the seigniorage in the Fed, which is far larger than the seigniorage capable in free banking, which itself is larger than the seingiorage capable in a 100% reserve standard?

    Your concern for people on "fixed" incomes is commendable. However, the problem here is not the 2% inflation; it is that their incomes are fixed. One solution would be a COLA clause that indexes nominal incomes to inflation. In fact, COLA clauses are common in high inflation environments.

    Ah, more nonsense. This time you fail in yet another respect in comprehending the heterogeneous nature of inflation. A worker's wages can only be indexed to inflation if the specific company they work for receives higher revenues because of the Fed generating inflation. But this is not necessarily the case. Inflation does not affect all firms equally. It affects some firms before others, and it affects firms differently because of the real changes in capital structure and labor allocation inflation brings about.

    Now, you will probably claim that the problem here isn't inflation, the problem is investors who are investing in projects that receive the new money last, or are investing in projects that are less affected by inflation than other projects, which means "the simple solution" is for investors to ignore consumer preferences and invest in projects that are initially affected by inflation, and projects that are most affected by inflation, i.e. Wall Street banks, military contractor industry, or housing from 2001-2007, all the projects that are not necessarily what the consumer wants, but only what is able to earn the most profits because of the heterogeneous nature of inflation over time and across firms and industries.

    In other words, you blame workers and employers for agreeing to rigid wages, you will probably blame investors for investing in projects the consumer wants rather than what is most profitable due to inflation, and you will blame everyone for being victimized by inflation because they couldn't do the impossible, which is increase their incomes before inflation has even gotten to them.

    Wow, you definitely are perfect for the Fed. Only people who can defend such fraud and exploitation can sleep at night, and they need you bright and chipper!

    The wealth transfers that occur from an unanticipated inflation can be significant.

    Inflation cannot affect the economy the way it is intended to affect the economy unless it is unanticipated. Perfectly anticipating increased incomes due to inflation makes inflation an empty pursuit, which means inflation has to accelerate over time if it going to keep having the effect it is meant to have.

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  78. Captain Freedom: As with Nate above, I notice that not all of your posts appear to be showing up here (I receive independent confirmation via gmail). I apologize for this apparent glitch. Can you try reposting the parts 2 and 3 of your reply? And if that doesn't work, I'll post them myself. Sorry for the inconvenience.

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  79. Are you still employed?

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  80. I missed the original post as it's been hard to find time to read (or write) blog posts since Jan.4 - having a baby is hard work!

    Everything said here makes me really want to read it though, any chance of a re-post?

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  81. PS: surely we can agree that whether or not inflation is a good or bad thing is subject to context?

    Sometimes it's a bad thing, sometimes a good thing and sometimes neither.

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  82. Everyone: For those of you who have posted and then not see your comments appear, I have discoverd the problem. This site sends selected posts to a purgatory file, where I then get to choose whether the post is spam or not. I have now released the posts from purgatory.

    Anon @4:19 I'm always employed.

    Adam P: The original post lives on. Just do a search for Ron Paul's Money Illusion.

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  83. Simply avoiding the word would have probably saved a lot of misery. I would have recommended "craniometrically challenged" or "craniovolumetrically challenged". Such neologisms are sometimes considered witty.

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  84. "I find it implausible that a regime of low and stable inflation has a first-order effect on wealth distribution."

    David,
    When house prices were jacked up over a couple of decades to 6-7x median salaries...compared to 1-2 x median salaries in decades past...do you see how that makes people who have yet to buy a house relatively worse off?

    do you see how people with insider knowledge of monetary policy decisions would have an advantage of when to buy cheap assets that are about to be inflated and when to get the hell out of the way of a monetary contraction?

    Goldmand Sachs and JP Morgan get hundreds of billions in option value on loans, regardless of wheter you are pleased loans have been paid back(be aware that JP Morgan was critical to starting the fed in 1913 so it really isn't a surprise that they benefit quite a bit from it).

    Do you think JP Morgan would give me free options on trillion dollar loans? no of course not...in fact in the summer of 2008 they completely closed my HELOC(luckily I didn't need it, but it was a shock to have them do that right before they forcibly took money from me and my kids through the power of the government).

    Overall I see a lack of financial sophistication on your part to see the various ways the public can be fleeced without having direct inflation tax applied.

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  85. Hi David,

    First I wanted to say thank you for taking the time engage in this debate.

    As a huge fan of Ron Paul, I was not horribly offended at the comment. I have seen my fellow libertarians call other politicians much worse, and I don't see them apologizing. You did the right thing and apologized for the comment, showing yourself as a man of integrity.

    You have consistently referenced low inflation in the U.S. This is true if you believe the official numbers. There are many that argue the official inflation numbers are intentionally inaccurate. One favorite source for non official inflation numbers is John Williams
    http://www.shadowstats.com/alternate_data/inflation-charts
    He claims to calculate the CPI using the same method as was used in 1980. This would bring current inflation to 8% or more.

    Do you think the official inflation numbers are reported honestly or do you think John Williams and others have a valid argument?

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  86. You say:

    Anon @4:19 I'm always employed.

    I say:

    As long as a flea can find a dog, the flea is always employed.

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  87. During the early 1980s, I was in the resume-writing business. A man came to me rather despondent because he had been looking for work for quite sometime with nary an offer. He told me that throughout the 1970s he had been an independent mortgage broker earning a good living, but when the Fed jacked up interest rates to unprecedented levels (prime rate above 15%) in the early 1980s, the mortgage market shut down and his business income fell to zero.

    At the time I lived in Geauga county, Ohio. During the 1970s while the Fed held interest rates low, the county enjoyed a boom in home building and escalating prices not unlike what occurred in the period preceding the current recession/depression (no, it isn't over yet IMHO). When the Fed applied those impossibly high interest rates in order to halt the raging inflation it had created, the housing market collapsed and many home builders went belly up; many home owners lost their homes. The largest local bank in the county, which had been a generous lender during the boom, ended up as the county's largest owner of housing as it foreclosed on delinquent mortgages and builders' loans. It too would have gone under but it was taken over at a distressed price by a large city bank to the chagrin of the family that had owned it for several decades.

    The Fed's power to manipulate interest rates and other aspects of the nation's monetary affairs is an arbitrary power over the lives of citizens that is entirely incompatible with human freedom. It can, and as Freedom Fighter has so logically demonstrated, transfer wealth in huge increments in its pursuit of "monetary policy." A free market in money like a free market in any other commodity would remove that unholy control from the hands of bureaucrats and politicians and place it where it belongs, in the hands of free people. The indisputable facts surrounding the creation of the Federal Reserve make it and the banks it was designed to enrich worthy of every citizen's contempt. Your part in the exercise of that clandestinely designed power over people's lives is equally contemptible.

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  88. Captain Freedom:

    Excuse me, but the $9 trillion the Fed has created and then given or lent to special interest groups is small potatoes compared to the $700 billion stimulus package Congress passed.

    I am not sure where you get that $9 trillion figure from. The size of the Fed's balance sheet currently stands at about $2.5 trillion; see here: http://www.clevelandfed.org/research/data/credit_easing/index.cfm

    To give some perspective, U.S. annual GDP is currently almost $15 trillion.

    And what makes you suggest that the $700B stimulus package passed by Congress constitutes the total claims by the government against its population? Are you misleading by intent, or by ignorance?

    No, it (public anger) should be directed at the Fed, because the Fed IS the big fish. It can, and has, created more money out of thin air than Congress can vote to spend.

    This is true to the extent that the Fed has the authority (granted by Congress) to purchase non-government assets, like MBS. But the Fed is required to invest only in the highest grade assets, in this case, the AAA mortgages of American citizens. Are you suggesting that American homeowners are deadbeats? (The return the Fed is earning on these assets is about 5%, and is remitted to the Treasury).

    But in normal circumstances, your statement is bizarre. The Fed normally just buys US Treasury debt. It can only monetize up to what Congress approves in the way of debt issue. Congress determines the total size of the debt. The Fed just determines its composition between its interest-bearing and non-interest-bearing components.

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  89. Edward:

    Yes, it is true that I am relying on the official inflation numbers. There is a whole literature out there devoted to the subject of index numbers.

    Thank you for the reference to John William's shadowstats. In fact, I was aware of his site and spent some time perusing it. I am not an expert in the area though. I will ask around to see what people think. May even do a post on it.

    Thanks!

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  90. Ned Netterville:

    I can honestly say that I know a bit of the pain you describe. I was employed in the construction sector in the early 1980s, and became unemployed during that sharp recession (that's when I went back to school).

    I don't think anyone at the Fed today, at least probably not here in St. Louis, would want to make the case that the Fed conducted its monetary policy optimally in the 1970s.

    The Fed has made mistakes. The Fed has admitted to mistakes. The Fed (claims to) learn from its mistakes.

    I am not here to defend the Fed. I am here to point out that there are several other forces operating quite apart from the Fed, and that it does no good to ignore those forces and blame the Fed for everything.

    In the context of the 1970s, we also had the severe supply disruptions (OPEC, commodity shortages, Vietnam, the abandonment of Bretton woods, fiscal pressures, etc. etc.).

    These shocks would have had significant negative repercusions whether or not a Fed was in existence at that time.

    Now, one might want to argue that the Fed made things much worse than they had to be. And one might want to argue that central banks are destabilizing. I never disputed the validity of these claims (or, at least, that they constitute legitimate subjects for debate). In my original post I was attacking something else (a specific claim made by Paul). People choose to ignore that, possibly because its more fun to misconstrue my statements, than it is to discuss them in a sober fashion.

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  91. I am also disappointed that you took the article down. I directed many people to it as an example of the arrogance and ignorance that passed for thoughtful analysis at the Fed.
    Arrogance to actually call someone a name shows that you have no rational arguments to counter with and ignorance in that the point ignor3ed the destruction of savings and the pain of those who are fixed incomes an d pensions and don't have the luxury of voting themselves pay raise.

    Yes, I am sorry it was taken down, it was an effective an argument in support of Dr Paul's point as any I have seen and certainly highlights the elitism in current Fed management.

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  92. Dan

    I guess those people in Weimar Germany weren't really affected by the hyper-inflation because while the number of marks it took to buy a loaf of bread quickly rose to infinity, the central bank obliged and rapidly created a near infinite supply of marks, so that the real value of their wages stayed constant.

    You must know in the real world inflation distorts different prices differently. For example, an iPad 2 is about three times better than an iPad 1 and yet they cost the same, a "real" price decrease. While at the same time prices in the supermarket are increasing at double digit levels. Now an astute observer mentioned that "you can't eat an iPad."

    But there is a more relevant point. The wealthier person is in a better position to buy that iPad whereas the poorer person who is seeing his real wages decline, will in fact see a decline in his standard of living.

    It must be great to have a job watching all the fish in the acquarium scatter when you drop in the fish food and then go home and eat your filet mignon.

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  93. I just posting this because I want there to be at least 100 comments.

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  94. I don't believe in Austrian BS. Mises, Rothbard, Hayek were all wrong and didn't understand how the real world works.
    However I do believe in America(despite living in its former enemy)
    Government/central bank intervention is needed for stability in the system.
    Central banks and banking system create employment and provide credit to small businesses that wouldn't be available in free markets. Consumer credit is necessary for higher standards of living that needed to prevent social unrest.
    Income inequality and unemployment were real causes of Great Depression not government intervention(and yes they were caused by free market)
    Now income inequality is as high as it was before Great Depression. However standards of living are also much higher. Therefore most people don't actually need redistribution of wealth they need stability.
    If Libertarians want to be taken seriously in 2012 they should stop promoting austrian voodoo economics and start to teach american working class to tolerate higher income inequality.
    However if you interested in discussion of pure free market system without central bank that can actually work in real world visit my forum [url]http://freemarketfascism.org[/url] :cool:

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  95. A little bit late here, but anyway. David: everyone who has a serious education in economics knows that what your post was about, and that it was essentially correct. Those who are self-taught by reading garbage do not, and they get hostile and angry. Try to ignore them and keep up the good work!

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  96. David Andolfatto wrote:

    "Recipients of money transfers have wealth redistributed toward them. Did I suggest otherwise?

    One thing you do not realize, however, is that the Fed is legally prohibited from making money transfers; this is the job of Congress (and they do a lot of this). The Fed is limited to purchasing assets, typically Treasuries, but recently in the form of MBS too. There were also the short-term emergency lending facilities. Most of those loans have now been paid back with interest, which the Fed remits to the Treasury."

    How is the Fed's perpetual bond subsidy anything other than a redistribution of wealth to bondholders, and bond dealers?

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  98. David: everyone who has a serious education in economics knows that what your post was about, and that it was essentially correct. Those who are self-taught by reading garbage do not, and they get hostile and angry. Try to ignore them and keep up the good work! China sourcing

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