Re: What about the Depression?

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Yes, and gasoline consumption went up a bit as well. Down only 4% year over year.

The deficit is also ‘automatically’ getting larger as well.

We could stop declining as fast and just go into ‘muddle through’ mode at higher levels of unemployment.

And this could encourage the mainstream to do what it can to minimize any fiscal response as the await ‘market forces and monetary policy kicking in.’

Obama recently stated we needed a fiscal stimulus to get things going, but then focus on ‘fiscal responsibility’ when the economy is growing again.

And they all say one of the major problems of the US government is the high level of debt.

Obama is also backwards on trade, as he talks about protecting US workers and opening new markets for US exporters.

Still hoping for the best!

Merry Christmas!

>   On Thu, Dec 25, 2008 at 1:37 PM, mauer195 wrote:
>   Everybody keeps focusing on the disastrous season that
>   retailers are supposed to be having, but then there’s this
>   news:

Consumers Spend More As Gasoline Prices Fall

By Annys Shin

Consumers increased their spending last month for the first time since spring, as falling gas prices helped boost their purchasing power, new data showed yesterday.

On an inflation-adjusted basis, consumers spent 0.6 percent more in November than they did the month before, the Commerce Department reported, the first increase since May. Disposable income also rose on an inflation-adjusted basis, by 1 percent, compared with an increase of 0.7 percent in October.

But even as consumers returned to stores and shopping malls, analysts cautioned that the data did not signal the start of a turnaround for the economy. Because energy prices are unlikely to sink at the same clip they have over the past few months, Americans won’t be able to pocket much more savings at the pump.


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63 Responses to Re: What about the Depression?

  1. Scott Fullwiler says:

    don’t know about Warren, but I just refer to it as the way banking actually works under a non-gold standard or non-currency board fx system. You need a gold standard or currency board for fractional reserve banking as commonly defined. So, the key characteristic seems to be the fx system.


    zanon Reply:

    jcmccutcheon: Good question. We *do* have FRB though, it just doesn’t work the way anyone thinks it does.

    I might call it a fiat money system. Everyone agrees that, in a fiat system, the Government can print money. No one takes the next step and asks: “if the Government can print money, why does it tax me?”

    that paradox helps people become open to the paradigm. You can move directly from that to “if the Govt prints money, and people put it under the mattress, how will that money ever show up as inflation?” Instantly, we have the Federal deficit funding private savings. Priceless.


    jcmccutcheon Reply:

    Yes I usually throw in the phrase “fiat money” when I try to explain this web site to people.


  2. warren mosler says:

    No, why would it be?

    And fractional banking as you are no doubt using the term is applicable only to fixed exchange rates systems like the gold standard.

    with today’s non convertible currency it’s a moot point.


    zanon Reply:

    Totally clear on capital requirements vs. reserve requirements. Thanks!

    Also, interesting to see countries who bank in non-domestic currencies deal with this crises — it’s not pretty! Sadly, it isn’t pretty in countries who bank in domestic currencies either.


    jcmccutcheon Reply:

    What is the best moniker for the banking system of today if not ‘fractional reserve banking’


  3. John Rogers says:

    Is fractional reserve banking a moral system?
    If I “loan” out money I don’t have isn’t that akin to counterfeiting?


  4. warren mosler says:

    you have both capital requirements and regulated assets as to quality and diversification.

    and yes, capital is ‘endogenous’in theory the same way reserves are. That is, there is always a price for capital, from which banks can set spreads on loans, etc. to achieve the return necessary to raise capital.

    But raising capital can be problematic and restrictive in the short and medium term.

    With non convertible currency as we have today, reserve requirements are not a constraint as previously discussed. That’s why dropping them to 0 changes nothing of substance.

    Dropping capital requirements to 0 coupled with insured deposits is a ‘free bet’ for a banker. Heads you win, tails the FDIC loses.


  5. zanon says:

    WARREN: Yes, there would be hoarding, and that would cause deflation. That said, Austrians would argue that, in a world with fixed money supply *and* technological progress, money *should* (slowly) increase in value, ie. there should be gentle but pervasive deflation. A mildly deflationary world should be as benign, indeed more benign, than a mildly inflationary world.

    SCOTT: It is totally unclear how much (or how little) regulation you would need, especially compared to the amount of regulation we have now, which can fill many warehouses.

    You would need a rule saying you have to match maturity. Banks would not have access to a CB — indeed, there would be no CB. Interest rates would be set by market forces (for better or for worse). Redemptions would be harder for investors *but this is a feature, not a bug*. If you want easy redemption, put your money in a vault and pay the annual security fee.

    It’s a *very different* system from the current one, but there have been systems in the past that have had elements of this. Yes, they have gone the way of the dodo, but all fiat currencies have gone the way of the dodo too, and the world seems to switch reserve currency every few hundred years as well.

    SCOTT/WARREN: OK, so with no reserve requirements, you just have capital requirements, which keep the banks for expanding their balance sheets too much. I’ll bite though — what is the difference? Isn’t the degree of leverage measured off deposits? Doesn’t that make reserve requirements can capital requirements the same thing?

    Also, I understand that Fed Funds rate is independent of reserve requirements (or lack thereof). Thanks!


  6. Scott Fullwiler says:

    Sorry to keep posting on this . . . but it sure seems like for a bunch of free marketers Austrians want to put a whole lot of regulation into the monetary system. Imagine how much regulation you would need to ever get it to work the way Zanon described in his last post. So much for trusting in “market forces.”


  7. Scott Fullwiler says:

    Thanks, Zanon

    You had banks creating loans without first having gold deposits under gold standards, too. Yes, it doesn’t increase the qty of gold, and can create difficulties for the banks in meeting withdrawals of customers, but the point still stands. In HK with the US$ currency board, banks can increase loans/deposits in HK$ without first having US$ deposits, but they just can’t go to the cb for help if the depositors want to withdraw more US$ than they have in reserve.

    Canadian banks are constrained the same way US banks are . . . capital requirements and bank regulation. Reserve requirements are NEVER an ex ante constraint if you’re not under a gold standard or the equivalent. (Sorry . . . I know that was intended for Warren.) Canada’s just one of several without reserve requirements.


  8. zanon says:

    Hi Scott/Warren:

    I think Austrians would disagree with you about “loans creating deposits” in their fixed money supply world. Money supply is fixed by the physical quantity of Gold, which yes increases slowly, but is actually pretty much fixed. Loans and Deposits come into being simultaneously as a borrower looking to have $100 for three years would be matched with a lender looking to loan $100 for three years. The “coordinator” would simply match these two, like an equity bookmaker matchers buyers and sellers in the stock exchange. The “coordinator” does not have a balance sheet. The lender cannot give out money he does not have. There is no currency issuer, everyone is a currency user.

    That said, there is lots of room for financial innovation here — finding better matches between would be investors and entrepreneurs is hard and important!

    And yes, Warren, this is essentially a barter economy with the currency acting as something that aids in coordination.

    But maturity matching actually dramatically reduces the panics and depressions. This is something that creates instability whether you are in fiat money or “commodity” money, and both system would do well to be rid of it.

    WARREN: As Canada has zero reserve requirements, what limits the size of banks’ balance sheets?


    warren mosler Reply:

    Yes, i can see how banks could be limited to intermediating those with actual gold certificates and those wanting to borrow them, matching maturities precisely, etc.

    The problem with a gold standard is the problem of hoarding unspent income that reduces aggregate demand and sets a deflationary spiral in motion.

    And a govt. that taxes and spends in that gold backed currency exacerbates the desire to accumulate the gold certificates by not spending income. People tend to desire to accumulate the thing they need to pay taxes and can quickly get to the point where they won’t lend their funds on any terms.

    We are seeing some of that today with non convertible currency with the govt. rapidly adding to supply. It gets a lot worse with convertible currency and the govt. not able to add to supply.


  9. knapp says:

    It’s true that Austrians don’t think in terms of floating fx. They think in terms of loanable funds (commodity-based) money vs. fiat money (vertical) and “fiduciary media” (horizontal) money. All Austrians are against fiat and favor gold. But there is discord as to whether banks should create money. The 100% reservists (modern day Currency School) led by Rothbard and now Hulsman, Salerno and Shostak say no. The Fractional Reservists (Banking School) led by Lawrence White and George Selgin say yes.

    The 100%’ers see demand deposits as a bailment, not a loan, so money is a warehouse receipt and lending out that money is equivalent to your dry cleaner lending out your leather jacket until you pick it up ( which was actually a very funny Seinfeld episode). It’s just the fungability character of money that makes it appear less of a crime.

    The 100%’ers see no problem with non-bank credit expansion as it represents a shift in savings not “created credit”, “out of thin air” from pyramided fiat money.

    For those interested, Shostak has a short piece here on Non-Bank Credit, and Selgin has a longer piece on Should We Let Banks Create Money:

    The two camps disagree about the stability of fractional reserve banking but both agree that fiat money is destabilizing.

    The bottom line is that Austrians of all stripes see the gold standard and its constraint on government as a force of stability that would bring about what Mises called an Evenly Rotating Economy. It’s a view of the economy as endogenously stable if not for the corrupting forces of gov’t institutions, and certainly not a system prone to depressions and panics. Obviously Keynesians don’t see it that way.

    The problem is that history provides no guide. True laissez faire implies no govt. As long as gov’t exists (and it always has in modern history) and has the power to “rewrite the dictionary” and “go off gold” then a true free market is purely an abstraction, not something that actually ever existed in history. Keynesians can’t claim the End of Laissez Faire when there was never a real beginning. Austrians, even if we grant their assumptions, must recognize that a gold standard is a false constraint, and a potentially destabilizing one, until the political culture is ready for a tiny govt, which it currently is not.

    Inherently Unstable or Endogenously Stable ???


    knapp Reply:

    my prior post got delayed (probably because of links).

    Zanon- i think you captured the Austrian view of natural deflation
    accurately. But many Austrians make no distinction between the productivity-only deflation (good deflation) that would occur in their free market model, and the more destabilizing Minsky-Fisher credit deflation(bad deflation) we are now experiencing. To them, its all good deflation. This hurts the Austrian cause by making them sound like heartless liquidationists; its not good economic analysis either.

    But debates about free banking and gold standards will never be resolved until there is agreement on the fundamental cause of market instability. Is it institutional or inherent? chicken or egg?


  10. Scott Fullwiler says:

    Right . . . cb can set bid/ask for reserves at any rate it wants, whether there are reserve requirements or not.

    I still maintain that Austrians simply don’t understand that even if they could get rid of the central bank or any other govt entity providing overdrafts, and even if you set up a % of the system with 100% reserves for the purpose of being piggy banks to the public, even with all this you would still have financial innovation and you would still have loans creating deposits, private sector interbank markets, etc. and thus horizontal expansion. For some reason, they don’t think that banks and other financial institutions are profit making entrepreneurs that innovate even as they nearly worship the innovation of non-bank entrepreneurs.

    Also, as Warren said, it’s a system that would be prone to depressions and disruptions in the pmts system due to rather simple events.


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