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Posts Tagged ‘Federal Reserve System’

Is Price Stability Really a Good Thing? | Mises Wire

Posted by M. C. on November 19, 2021

Contrary to popular thinking, there is no such thing as a price level that should be stabilized by the central bank in order to promote economic prosperity. Conceptually, the price level cannot be ascertained, notwithstanding the sophisticated mathematics. Obviously if we do not know what something is, it stands to reason that we cannot keep it stable. Policies aimed at stabilizing an unknown price level only stifle the efficient use of scarce resources and lead to economic impoverishment.

https://mises.org/wire/price-stability-really-good-thing

Frank Shostak

One of the mandates of the Federal Reserve System is to attain price stability. It is held that price stability is the key as far as economic stability is concerned. What is it all about?

The idea of price stability originates from the view that volatile changes in the price level prevent individuals from seeing market signals as conveyed by changes in the relative prices of goods and services.

For instance, because of an increase in the demand for apples, the prices of apples increase relatively to the prices of potatoes. This relative price increase gives an impetus to businesses to increase the production of apples relative to potatoes.

By being able to observe and respond to market signals as conveyed by changes in relative prices, businesses are said to be able to stay in tune with market wishes and therefore promote an efficient allocation of resources.

It is held that as long as the rate of increase in the price level is stable and predictable, individuals can identify changes in relative prices and thus maintain the efficient allocation of resources. However, when the rate of increase is unexpected, i.e., of a sudden nature, it tends to obscure the relative price changes of goods and services. This in turn makes it much harder for individuals to ascertain the true market signals. Consequently, this leads to the misallocation of resources and to a loss of real wealth.

Note that in this way of thinking changes in the price level are not related to changes in relative prices. Unstable changes in the price level only obscure but do not affect the relative changes in the prices of goods and services.

So if somehow one could prevent the price level from obscuring market signals, obviously this will lay the foundation for economic prosperity. Consequently, a policy that can stabilize the price level will enable businesses to observe the relative price changes. This in turn will allow businesses to abide by consumers’ wishes.

The Root of Price Stabilization Policies: Money Neutrality

At the root of price stabilization policies is a view that money is neutral—that changes in money only have an effect on the price level while having no effect whatsoever on the real economy.

For instance, if one apple exchanges for two potatoes, then the price of an apple is two potatoes and the price of one potato is half an apple. Now, if one apple exchanges for one dollar, then it follows that the price of a potato is fifty cents. The introduction of money does not alter the fact that the relative price of potatoes versus apples is two to one. Thus, a seller of an apple will get one dollar for it, which in turn will enable him to purchase two potatoes.

Under the framework of monetary neutrality an increase in the quantity of money leads to a proportionate fall in its purchasing power, i.e., a rise in the price level, while a fall in the quantity of money will result in a proportionate increase in the purchasing power of money, i.e., a fall in the price level. None of this will alter the fact that one apple will be exchanged for two potatoes, all other things being equal.

Now, following this logic, if the amount of money has doubled, the purchasing power of money is going to halve, i.e., the price level is going to double. This means that now one apple can be exchanged for two dollars and one potato for one dollar. Despite the doubling in prices, a seller of an apple can still purchase two potatoes with the two dollars obtained.

We have here a total separation between changes in the relative prices of goods (how many apples exchange per potato) and the changes in the price level. Why is this way of thinking problematic?

How New Money Enters the Economy: The Cantillon Effect

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12 Myths Fueling Government Overreach in Times of Crisis | Mises Wire

Posted by M. C. on April 26, 2021

Politics cannot be put aside. Politics is what politicians and political interest groups do. Partisanship is inevitable as political actors who seek conflicting ends struggle for maximum control of the government.

https://mises.org/wire/12-myths-fueling-government-overreach-times-crisis

Robert Higgs

Congress and the president have adopted many critically important policies in great haste during brief periods of perceived national emergency. During the first “hundred days” of the Franklin D. Roosevelt administration in the spring of 1933, for example, the government abandoned the gold standard, enacted a system of wide-ranging controls, taxes, and subsidies in agriculture, and set in motion a plan to cartelize the nation’s manufacturing industries. In 2001, the USA PATRIOT Act was enacted in a rush even though no member of Congress had read it in its entirety. Since September 2008, the government and the Federal Reserve System have implemented a rapid-fire series of bailouts, loans, “stimulus” spending programs and partial or complete takeover of big banks and other large firms, acting at each step in great haste.

Any government policymaking on an important matter entails serious risks, but crisis policymaking stands apart from the more deliberate process in which new legislation is usually enacted or new regulatory measures are usually put into effect. Because formal institutional changes—however hastily they might have been made—have a strong tendency to become entrenched, remaining in effect for many years and sometimes for many decades, crisis policymaking has played an important part in generating long-term growth of government through a ratchet effect in which “temporary” emergency measures have expanded the government’s size, scope, or power.

It therefore behooves us to recognize the typical presumptions that give crisis policymaking its potency.

The twelve propositions given here express some of the ideas that are advanced or assumed again and again in connection with episodes of quick, fear-driven policymaking—events whose long-term consequences are often counterproductive.

1. Nothing like the present situation has ever happened before. If the existing crisis were seen as simply the latest incident in a series of similar crises, policy makers and the public would be more inclined to relax, appreciating that such rough seas have been navigated successfully in the past and will be navigated successfully on this occasion, too. Fears would be relieved. Exaggerated doomsday scenarios would be dismissed as overwrought and implausible. Such relaxation, however, would ill serve the sponsors of extraordinary government measures, regardless of their motives for seeking adoption of these measures. Fear is a great motivator, so the proponents of expanded government action have an incentive to represent the current situation as unprecedented and therefore as uniquely menacing unless the government intervenes forcefully to save the day.

2. Unless the government intervenes, the situation will get worse and worse. Crisis always presents some sort of worsening of something: the economy’s output has fallen; prices have risen greatly; the country has been attacked by foreigners. If such untoward developments were seen as having occurred in a one-off manner, then people might be content to stick with the institutional status quo. If, however, people project the recent changes forward, imagining that adverse events will continue to occur and possibly to gather strength as they continue, then they will object to a “do nothing” response, reasoning that “something must be done” lest the course of events eventuate in an utterly ruinous situation. To speed a huge, complex, “anti-terrorism” bill through Congress in 2001, George W. Bush invoked the specter of another terrorist attack. Barack Obama, Invoking the specter of economic collapse, rushed through Congress early in 2009 the huge Economic Recovery and Reinvestment Act before any legislator had digested it. In a February 5, 2009, op-ed in the Washington Post, he wrote, “If nothing is done … our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.”1 At a February 9 press conference, he said “[A] failure to act will only deepen this crisis,” and “could turn a crisis into a catastrophe.”2

3. Today is all-important; we must act immediately.

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EconomicPolicyJournal.com: Best Evidence Top Federal Reserve Officials Have No Clue

Posted by M. C. on January 6, 2021

This climb in asset prices will very likely find its way in 2021 to consumer prices and the spike in consumer prices will be well over 2%. In the EPJ Daily Alert, I am forecasting price inflation will easily hit 3% this year and then 5% and possibly 10% within 18 months.

The Fed has no clue.

https://www.economicpolicyjournal.com/2021/01/best-evidence-top-federal-reserve.html

Loretta J. Mester, President and Chief Executive Officer of the Federal Reserve Bank of Cleveland delivered a speech at the Allied Social Science Associations Annual Meeting (via videoconference). Here is her remarkable comment on price inflation in the talk:

I expect this post-vaccination phase of the recovery to continue over the next few years, with growth above trend, declines in the unemployment rate, and gradually rising inflation…Nor would the strengthening in growth I expect to see later this year necessitate a change in our policy stance because I expect that the economy will still be far from our employment and inflation goals…The economy’s intrinsic dynamics suggest that inflation is not going to move up quickly above 2 percent. 

At the same ASSA meeting,  Chicago Federal Reserve President Charles Evans said:

It likely will take years to get average inflation up to 2 percent, which means monetary policy will be accommodative for a long time…The bottom line is that it will take a long time for average inflation to reach 2 percent.

This is the type of thinking going on in the Federal Reserve System.

It is absolutely stunning. They are simply looking at price inflation over recent past years and are making projections based on the recent past that price inflation will not spike above 2%.

This despite the fact that in 2020, the Federal Reserve increased the money supply by $4 trillion (an increase of 25% plus) and that asset prices from housing to the stock market to Bitcoin are soaring because of the massive money pump.

This climb in asset prices will very likely find its way in 2021 to consumer prices and the spike in consumer prices will be well over 2%. In the EPJ Daily Alert, I am forecasting price inflation will easily hit 3% this year and then 5% and possibly 10% within 18 months.

The Fed has no clue. By the end of 2022, I am going to have to update my book, The Fed Flunks: My Speech at the New York Federal Reserve Bank, with a new chapter pointing out the above failure of Federal Reserve officials to recognize the irresponsible money printing that they are now conducting. –RW

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The 75 IQ Version of American History – LewRockwell

Posted by M. C. on January 12, 2019

https://www.lewrockwell.com/2019/01/thomas-woods/the-75-iq-version-of-american-history-strikes-again/

By 

Tom Woods Show

From The Tom Woods Letter:

There’s still lots of talk about that 70% top marginal tax rate, and why it’s supposed to be a great idea.

Heck, they say, we had rates even higher before, and everything was fine!

Ahem.

I emailed you last week about that, and then I devoted episode #1314 of the Tom Woods Show — subscribe for free at TomWoods.com/iTunes — to further detail on the subject.

The (very quick) answer is that thanks to deductions and outright evasion, those high rates were essentially not paid.

Here’s how someone in my private group described the simpleton manner in which the topic is being discussed: Read the rest of this entry »

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