Then what are we even disagreeing about now?
If the banana stand is so successful, then why would it need continual Fed financing?
Go back to the first few responses in the thread
The Fed didn’t take any money they simply bought bonds and in turn gave the seller a check. Once someone deposits this check it becomes apart of the money supply.
These bonds than earn interest which the Federal reserve can profit from and the money the earn from this is handed down to the Treasury and the other regional banks.
Let me rephrase then. Why would nobody else want to finance it (or continue to finance it), except the Fed?
Bought them with what?
by issuing a Check to the seller…I already said that, and than the dealer will deposit the check…
Actually now we are getting into theory about the velocity of money and if it is stable or not,but i’ll save that for another day.
So basically by bringing more money into the economy. Which will distort prices… so how is this going to be neutral?
That was just the assumption given the initial problem. To continue to finance it without the Fed, you now have to raise capital by voluntary means.
I was basically trying to explain that Fed operations do not actually cost the tax payer any money,but its actual policies may or may not distort prices.
Now we are finally getting into the biggest economic debate of the 20th century, and it is especially interesting that this came about after i described the process of open market operations. The debate goes like this:
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If the velocity of money is always stable than Federal reserve policy will always have a direct impact on prices. Thus if the federal reserve raises the money supply by 10%, then prices will rise by 10%!
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obviously if the velocity of money is not stable the theory falls apart, but even if the velocity of money is stable two things must occur.
A) people must not hoard.
B)Consumers might just invest in stocks and bonds, and thus pushing interest rates down. Thus GDP does not budge.
I was basically trying to explain that Fed operations do not actually cost the tax payer any money,but its actual policies may or may not distort prices.
Now we are finally getting into the biggest economic debate of the 20th century, and it is especially interesting that this came about after i described the process of open market operations. The debate goes like this:
-
If the velocity of money is always stable than Federal reserve policy will always have a direct impact on prices. Thus if the federal reserve raises the money supply by 10%, then prices will rise by 10%!
-
obviously if the velocity of money is not stable the theory falls apart, but even if the velocity of money is stable two things must occur.
A) people must not hoard.
B)Consumers might just invest in stocks and bonds, and thus pushing interest rates down. Thus GDP does not budge.
Maybe I’m missing something here, but perhaps you can clarify. Is your suggestion that after the initial investment by the Fed, there are no further distortions in the economy, since the Fed would continually reinvest the same $1,000,000 annually, provided the venture is a going concern?
Let’s assume profitability signals consumer satisfaction. How would you know the venture would still be profitable if instead, after the Fed’s initial investment, it were financed continually through voluntary private funding?
Yes, provided the Fed is now acting as any other businessman
I wouldn’t know anything. You asked if the venture could not contiune without the Fed reinvesting the capital and I said it could provided you could now raise capital by voluntary means. After you raise the capital, we can wait and see if you continue to be profitable.
But they do. Once that money is used, prices will rise, to the benefit of the first/earlier recipients of the money/cheques/whatever. Inflation is a stealth tax.
Thanks for the clarification. I think you present an interesting scenario. I will give it some thought and will provide a response later on.
Prices don’t always rise though. For example right now the interest rate has bean near zero for some time,but inflation has not really took off. Economics is one of those subjects where statements are purely conditional. Thus a theory is only right in some circumstances,but wrong in other circumstances.
The general price level hasn’t increased by an amount you’d suspect from the level of monetary inflation, but the volume of lending has also been decreasing. The general price level, however, has increased, and the rate at which it is increasing is continuing to augment. The important inflation, however, is taking place in areas where new bubbles are forming, such as the commodity and stocks bubble. If you want a more accurate method by which to track inflation, all you need to do is look at gold.
What I am trying to say is that a near 0% interest rate is not always going to lead to high inflation, and this is because right now demand is weak in most areas of the economy. Obviously if demand was stronger we would have higher inflation.
Although I agree with part of the analysis (although, I’d substitute “demand” with “demand for capital-goods”, i.e. investment is lacking), I disagree that over the long-run a 0% interest rate will not lead to high inflation. Once lending picks up, and that money finds its way to wages, inflation will grow astronomically. Ultimately and inevitably, the credit expansion which has taken place since December 2007 will be manifested through general price inflation.
If the government has credit to borrow and issue bonds, it has the credit to issue its own (legal-tender) treasury notes without a middle-man (Fed)
An example which did happen, even if 190 years ago:–
“National paper money is an economical instrument. Skilfully used, it works wonders. As an illustration, the case of a market, constructed in the island of Guernsey, may be cited. The material wealth of that small island is computed at four millions sterling. Instead of borrowing money at interest to build the edifice, the inhabitants issued notes of their own, founded on their own credit. This was done by the authority of their local parliament or States. The estimated cost of the market was £4,000 [4222l. 1s. 9d., to be exact], and four thousand one pound notes were issued. These were paid to the contractor as the works proceeded; with these he paid the wages of those he employed; they in turn gave them to the shopkeepers for goods, the shopkeepers gave them to their landlords for rent, and they again re-distributed them among society. In this manner they were kept floating about, fulfilling the functions for which they were created. In due season the market was completed [on Friday, 11th of October, 1822.]. It contained eighty shops, which were let to butchers at five pounds a year; so that the annual rental was £400. At the end of the first year of tenancy four hundred of the one pound notes which had built the market, having been received as rent by the States, who were the owners of the national building reared up with the national money, were burnt in presence of the official authorities. The same operation was repeated from year to year for ten years; at the expiration of which period all the notes were redeemed, and, being cancelled, of course passed out of circulation. But the annual rent did not cease; it exists to this day[1857], and is applied to local improvements. Thus a substantial reality was created out of a symbol; for it is plain that the market did not cost a farthing to any one of the Guernsey people. In the same manner bridges, railways, and canals may be constructed, without paying a farthing of interest to bullionists.”