It is against the principles of the free market to force a currency upon a group of citizens- whether it fluctuates or not.
Gold is the better money. People widely think that it is valuable. there is alot of use for it. easily divisible.
Why would any mining company want to inflate gold? Doesnt it have to pay its workers with gold to produce gold? Only at a profit they can do this. When there is no profit to be made, thats when the production stops.
Putting resources and time to produce gold is harder than to simply press a few clicks to create electronic cash.
Jumping the mexican jumping bean there. Under market equilibrium firms will have to produce to the point where marginal cost equals marginal revenue.
It’s not enough for a mine to sell just enough to pay its workers. It has to continually increase its fixed capital investment to keep up with the output of the other mines, otherwise it’s not going to have enough revenue to pay fixed costs plus wage growth.
It could.. but not for any extended period of time.
It could, but where’s the incentive to do it? There are certain public choice issues associated with the central bank pursuing a contractionary or stationary policy.
The central bank can only freeze the supply of base-money, it cannot prevent private banks from creating bank money (deposits and notes) unless a 100% RR is forcefully implemented.
Well, if markets worked, the unregulated banking sector wouldn’t be allowed to exist for any extended period of time.
Like crashing the economy and putting everyone out of work? That’s definetly a major public choice issue you’re going to have to circumvent. I always thought it would be best to have a natural law vanguard party seize the means of legislation.
The world’s population is increasing by 1.1% yearly. Gold production increases at this point at 1%.Without fractional reserve banking it’s hard to imagine any significant increase in the money supply under a gold standard. Actually a gold standard would be deflationary. More participants in the market with less money means lower prices
The gold supply is constantly increasing. It has been for well before the US government existed. If that isn’t long term inflation I don’t know what is.
Price inflation and gold (or money) supply are two different things, and have two different meanings. Read the pages indicated above before ridiculing yourself.
The Selgin paper doesn’t address the fact that the business cycle moderated after the introduction of the Fed and countercyclical policy.
Read the entire paper before making such unfounded conclusions.
It’s likely that many deposit insurance schemes are overfunded, but lowering DI isn’t the same as getting rid of it entirely. Looking at introduction of new schemes is a different story.
The financial sector is the second most regulated industry in the economy right behind energy.
Most of the regulations have proven to be destablizers; they have created unintended consequences which contributed to the 2008 financial crises and have in fact prolonged it (Basel 1 and 2 come to mind immediately). The regulations proposed today, namely Dodd-Frank, are equally disastrous and will undoubtedly yield the same sort of result. This is due to the fact that arbitrary, ad-hoc political decrees can never match the efficiency of natural market mechanisms that directly tie individual interests to performance, i.e., create actual accountability.
It appears that you’re unfamiliar with Public Choice theory. It’s becoming more and more obvious that you really don’t know what you’re talking about (though it was fairly obvious right at the start when you conflated AE with libertariansism),
You’re not presenting an argument. Nothing in those papers denies the fact that the two somewhat industrialized countries that tried free banking (Sweden and Australia) didn’t magically stop having a business cycle, or even suggests that introduction of countercyclical policy didn’t stabilize them.
That is what you’re trying to say, though. Isn’t it?
Maybe, but I generally disagree. Basel has been accused of being procyclical (which would counteract central bank countercyclicality and is something you should be supporting), and it probably fucked up, but it’s not the only financial regulation out there. Overall more regulated banking systems fared better during the crisis.
edit: link not posting
Monetary factors mattered too, everyone agrees on that. It’s just a matter of how much. Was the global financial crisis due to a few regulations and the FMs destroying the world economy? It actually looks like central bank interest rates don’t do a very good job of explaining yield curve inversion.
“the fact that the two somewhat industrialized countries that tried free banking (Sweden and Australia) didn’t magically stop having a business cycle”
Your concern was the occurrence of business cycles after the establishment of the Fed.
I provided a bunch of links above, that you did not bother to read.
“Overall more regulated banking systems fared better during the crisis.”
Crises generally occur because of such regulated banking systems. Also, scottish free banks could also act as a “lender of last resort”. See Free Banking in Britain :
“Any potential erosion of general confidence in bank notes from the Ayr failure was halted by joint action of the Bank of Scotland and the Royal Bank. On the day before the Ayr Bank went into liquidation the two banks advertised that they would accept the notes of the defunct bank. The benefits of this action to the two banks are clear: it would bolster public confidence, attract depositors, and help put their own notes into wider circulation. The potential cost was surprisingly low because of one of the most remarkable features of Scottish free banking: the unlimited liability of a bank’s shareholders. Despite their magnitude, the Ayr Bank’s losses were borne entirely by its 241 shareholders. The claims of its creditors, including note-holders, were paid in full.”
“Evidence also emerges in favor of the hypothesis that barriers to entry reduce the ratio of credit to deposits.”
In a free banking system, a decrease in reserve ratios over time does not necessarily reflect instability of the banking system. Such phenomenon is more likely to reflect an enhancement of trust in banks, and this is reflected in lower costs of obtaining specie. In contrast, a decrease in reserve ratios in a regulated banking system, especially a regulated one with deposit insurance, is likely to reflect risk-taking incentives.
“It actually looks like central bank interest rates don’t do a very good job of explaining yield curve inversion.”
Stop just posting these things out of the blue without offering any supporting explanation. The analysis does find some relation between monetary phenomena and business cycles, which I didn’t dispute, but the magnitude of the effect is incredibly small. Their model R squared is about 15% and not only do the variables they’re looking at (like DEP, the investment rate) have R values of less than 0.03, they’re affected by many, many factors besides government policy anyway.
If that analysis was performed for publication in an economics journal it would probably conclude that the tangential evidence for the Austrian business cycle theory arrived at through the regression was weak if not tenuous.
The evidence that you cite does not in fact make the case that more regulation yields a sounder financial system. Again, the American financial system is highly regulated. The conclusion drawn is that certain regulators and certain types of regulation yield financial stability, i.e., one where the regulators are consolidated into a uniform body as opposed to the American system, where there are multiple agencies responsible for bank regulation both at the federal and state level.
But either way, the performance of today’s ‘sound financial systems’ (such as Canada, for example) pale in comparison to the financial stability that existed during the 19th century in nations that had a free banking system. I suggest George Selgin’s work on this matter. He cites a torrential amount of empirical evidence.
I don’t think you understand what this is saying at all, and I would really prefer you stop bull-shitting. I already called you out on your nonsense before with respect to CDO’s and MBS’s acting as money. But very quickly, our current account deficit is, in part, a result of monetary policy and the international monetary system.
True. But it’s also possible raising interest rates could create more problems. Higher interest rates raise the return to foreign investment capital inflows, and the current account moves inversely to capital inflows. I don’t know. There are probably more direct solutions.
Anyway, the important part of the paragraph was the part about the monetary policy stance.
I don’t know about that. No doubt there are always various government policies that work against stability, but those have always existed, and countries like Chile, Sweden, Canada, and Australia each suffered through business cycles in the 1870s and 1880s despite having much less “distortionary” government intervention and such than we do today. If free banking (by that I mean “private note issue” and no other legislative changes) was subject to banking crises under the relatively laissez faire free trade conditions of the late 19th century, wouldn’t it be even more unstable if implemented today?
Table 1 presents results for the different models and sub-samples. Overall there is a strong positive relationship between credit growth and the probability of having a banking crisis. Although credit growth lagged one year is associated with a lower probability of a crisis, credit growth from two to five years earlier is strongly positively related to a crisis. The sum of lag coefficients in column 1 is 0.487. In the OLS model, the sum of coefficients implies that a sustained five year period rise of one standard deviation or 0.10 log points in real bank loans would be associated with a rise in the probability of a banking crisis of 0.049. The results are somewhat larger if we use the logit specification from column 2. Here a rise in the growth of real credit from 0.05 to 0.15 (roughly one standard deviation above the mean) would raise the predicted probability by 0.15. For the sample that is restricted to the post-World War II period, the impact is slightly smaller. Here there is a rise in the probability of 0.06 when the mean growth of credit rises from its mean of 0.04 by one standard deviation to 0.10. These results are in line with Schularick and Taylor and the literature on credit booms surveyed above. They pave the way to thinking about the fundamental drivers of credit growth.
[…]
Table 3 shows that changes in the short-term nominal interest rate are also a significant determinant of credit growth. When short-term interest rates fall, credit growth rises. This result is also robust to using ex post real interest rates. The relation between interest rates and credit seems to be consistent with the Borio and White story that low interest rates reflecting benign inflationary expectations can provide an environment favorable to creating a credit boom. It is also consistent with a simpler story emphasizing the role of loose monetary policy in fueling a credit boom. This result together with the relationship between credit and income growth resoundingly rejects any role for income concentration.
As a robustness check, three other variables were included in Table 3: money growth, changes in the rate of investment relative to GDP and changes in the current account to GDP ratio. Mendoza and Terrones (2008) found that a rise in the current account deficit accompanied credit booms, but their sample included many emerging markets as well as leading countries. Our sample is limited to a subsample of the most developed countries. Here current account deficits have no significant relationship with credit growth.
A long literature on credit booms argues that technological breakthroughs and displacements drive investment and these need to be financed with credit (Fisher 1933, Kindleberger 1978, Minsky 1986). After controlling for the business cycle and the interest rate, we find no convincing evidence that higher investment is associated with credit growth. Money supply growth is also not associated with credit growth. This result is consistent with Schularick and Taylor (forthcoming) who demonstrate that post World War II a long standing tight correlation between growth in the money supply and bank lending broke down. According to them, this reflected financial innovation that allowed banks to increase their leverage by not relying strictly on deposits for their funding. Overall then low interest rates and strong economic growth seem to be the most robust determinants of credit growth.
None of the econometric model we deployed can reject the null hypothesis that top income shares have no relationship with changes in credit. Our cross-country evidence is also inconsistent with Kumhof and Rancière who argued that rises in inequality could give rise to credit booms and financial crises. The results in Table 1 show a high probability of a banking crisis after credit growth rises, but since top income growth is not a determinant of credit growth, income concentration is not associated with banking crises. Indeed, unreported regressions that include growth in top incomes in regressions like those of Table 1 show that income inequality is not a significant determinant of banking crises in our sample.
Finally, keep in mind that a boom is not sustainable without cheap money. See The Stock Market, Credit and Capital Formation, by Fritz Machlup :
“If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, the boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted.”
“countries like Chile, Sweden, Canada, and Australia each suffered through business cycles in the 1870s and 1880s despite having much less “distortionary” government intervention and such than we do today.”
Look, I’m not saying there’s zero link between interest rates and credit booms. Raising interest rates will slow credit growth. It’s a very crude tool to do this and will have other effects on the economy too, not all of them good, but it will work if that’s your only objective.
I’m just saying that there are other things going on. Even freezing the monetary base and 100% reserve requirements wouldn’t, by itself, get rid of credit growth.
According to Bordo, there’s a -0.24 relationship between short term interest rates (I thought underpricing of long term interest rates was supposed to be the main factor, but whatever) and credit growth. This is the R value. The R squared value, the fraction of variance in the dependent variable (credit growth) explained by variance in the independent variable (interest rates), is the square of that. Which means that a whopping 6% of credit growth variance is explained by changes in short term interest rates (and presumably, by extension, central bank policy).
And with a sum of the credit growth-to-crisis lag coefficients equal to 0.5, the explained variance is 25%. So we’re talking about 6% * 25% = less than 2% of financial crisis probability being explained by variance in interest rates (if monetary expansion-to-interest rates-to-credit growth-to-crisis is the only line of causality we’re looking at).
And it’s not like higher interest rates are costless, there are other objectives like reducing unemployment that central banks care about besides reducing the probability of financial crisis by one or two percent.
Isn’t the private sector able to produce inflationary credit too, though? Aren’t financial derivatives and so forth (which played a much greater role in the crisis than any monetary base transactions) some type of inflationary credit in your book?
I should also note that the only way to completely get rid of credit growth would be to outlaw credit growth through far reaching financial regulations to eliminate all fractional reserve banking and paper currency, abolition of public property in land and application of all rents of land to private purposes, equal liability of all to work, and abolition of all forms of interest and credit.
“Even freezing the monetary base and 100% reserve requirements wouldn’t, by itself, get rid of credit growth.”
If credit grew in pace with demand for money, there will be no business cycles.
“According to Bordo, there’s a -0.24 relationship between short term interest rates … and credit growth.”
See table 3.
“This is the R value.”
The problem with the correlation coefficient is that it tells us nothing about the direction of causation (especially if you use cross-sectional rather than a cross-lagged analysis). This is why empirical work should be supplemented with further explanations. Like I said before, without cheap money, a boom is unsustainable. It is true however that the interest rates are not the whole story, but certainly not for the reasons you think.
“Aren’t financial derivatives and so forth (which played a much greater role in the crisis than any monetary base transactions) some type of inflationary credit in your book?”
Not without inflationary credit.
“I should also note that the only way to completely get rid of credit growth would be to outlaw credit growth through far reaching financial regulations to eliminate all fractional reserve banking and paper currency, abolition of public property in land and application of all rents of land to private purposes, equal liability of all to work, and abolition of all forms of interest and credit.”
What kind of “free banking” are we talking about here? Fractional-reserve or full-reserve? I highly suspect the former. This has been brought up before, so why are you ignoring it? I can only imagine it’s because you’re being intellectually dishonest and therefore trolling.