Thursday, July 17, 2008

Money, Part 2

The law of supply and demand says that when the supply of something goes up, the price per unit of that thing goes down. If there is not a lot of money, it is valuable, and will buy a great deal. If there is a lot of money, it is not so valuable, and it will not buy much.

Inflation is an increase in the amount of money circulating. World wide, government officials are creating so much money that the money is losing its value and prices are rising. Inflation is not the same thing as rising prices. Inflation causes prices to rise.

All governments inflate. Dictators... because they fear revolutions. If they raise taxes too much they run the risk of being overthrown or assassinated. In a democracy, revolutions are not a problem... elections are.

We all know politicians promise people what they want in order to get elected. Voters always elect the person who is offering what they want. Once elected they can't raise taxes enough to cover all they promised (Remember the first President Bush and his, "Read my lips, no new taxes!"). So what do they do? They print more money... or, in the U.S., they use The Federal Reserve.

Now, I don't really have a good grasp on the Federal Reserve (often referred to as the FED). This You Tube clip does a good job of explaining... better than I can. Ron Paul, as seen in this clip, drafted a bill to abolish The Federal Reserve.

Interestingly, JFK (President John F. Kennedy)signed an executive order in June of 1963 returning to the federal government, specifically the Treasury Department, the Constitutional power to create and issue currency without going through the privately owned Federal Reserve Bank. This meant that the certificates, or United States Notes (remember our money today is Federal Reserve Notes), were actually backed by silver held in the U.S. Treasury, giving them real value. President Kennedy was assassinated on November 22, 1963 (5 months after signing the executive order) and the more than $4 billion United States Notes he had issued were immediately taken out of circulation. There are many conspiracy theories about the assassination of JFK. I find this information interesting. (This is interesting if you want to read further).

More on The Federal Reserve... and the current hot topic of the Fannie Mae bail out next time.

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." Thomas Jefferson

UPDATE 8-5-08: The fabulous blbeamer, who is not boring, did some super sleuthing and left me the following comment on another post:

Hi, I'm looking forward to your return.

In the meantime, please allow me to exhibit how boring I am: in an earlier post you provided a quote from Thomas Jefferson. I mentioned that something about it didn't sound right. Two Dogs provided a link to a web site where I could find the quote.

Not satisfied, I contacted the Jefferson Library in Charlottesville, Virginia. In short, the quote is bogus. Here is their reply:
Dear Mr. XXXX,

This is not a Jefferson quotation, as far as we know, but it has been
around (and attributed to Jefferson) since at least the 1930's. For
more information on this one, see our website at this

I hope this is helpful!

Anna Berkes
Research Librarian

Jefferson Library
P.O. Box 316
Charlottesville, VA 22902

In the interest of historical accuracy, and to hopefully elevate the discussion, I wanted to share.

Thank you very much Mr. blbeamer!!!


Melody said...

Very interesting. I'll have to come back and watch the video clip when I have more time. Scary quote by Jefferson. Hopefully he was wrong. :-(

Roland Hulme said...

You know I love it when you quote Thomas.

Two Dogs said...

Oooooo, it's getting more interesting. I cannot believe that you keep saying that junk about being more or less dumb. Women just confound me no end.

Two Dogs said...

And the Freeper link is done dead. Now I really want to know what it is.

BLBeamer said...

Hi. I got here via One Salient Oversight. Nice blog.

Have you been able to confirm that quote by Jefferson? It doesn't sound like him. Maybe it's paraphrased into 21st century American English, but it sure doesn't sound like an 18th century intellectual's words.

If you have the link to that quote, please share it. Thank you.

Coffee Bean said...


I am trying to get that quote verified... it did not occur to me to do that before putting it here.

Two Dogs said...

Here I am to save the day!!!!

Quote World

Coffee Bean said...

Thank you so much Two Dogs! You are amazing!

blbeamer, follow the link in Two Dog's comment. Great site! Much better than the other quote sites I've been slugging through!

BLBeamer said...

Thank you, Two Dogs.

One Salient Oversight said...

The law of supply and demand says that when the supply of something goes up, the price per unit of that thing goes down. If there is not a lot of money, it is valuable, and will buy a great deal. If there is a lot of money, it is not so valuable, and it will not buy much.

Inflation is an increase in the amount of money circulating.

Actually there's a bit more to it than that.

Money, like any commodity, rises and falls in value not just because of supply issues but because of demand issues.

In other words, if the demand for money increases and the supply does not increase at the same rate, you could have a situation in which the money supply is growing but deflation is being experienced.

This is what Japan experienced for a while in the late 1990s - deflation along with a growing money supply (although the growth in money supply was quite slow).

It is also therefore possible that if the market's demand for money suddenly drops, and if supply is not adjusted, you could have inflation along with a shrinking money supply.

Controlling inflation is therefore not as easy as stopping the creation of money - it is adjusting the supply of money to meet demand.

Central banks these days now use inflation as the main indicator of what to do regarding monetary policy. By keeping inflation under control, central banks ensure that the supply of money and the demand for money is kept within a certain range.

My opinion is that the only workable solution is to have "Absolute Price Stability", whereby prices neither rise nor fall over the course of the business cycle. In other words, there is neither inflation nor deflation, but "zeroflation" or "noflation". Such an aim is impossible to achieve in the short term (prices rise and fall all the time) but if prices remain neutral (and by that I am referring to the CPI) over the long term, then Absolute Price Stability can be achieved.

Central Banks in Europe and Australia use "inflation targeting", where they try to keep inflation below a predetermined rate (in Europe it is supposed to be between 0-2% inflation, in Australia it is between 1-3% inflation). Absolute Price Stability would mean that this "target" would be zero.

Unfortunately, the only country to experience a form of "noflation" in recent times was Japan - unfortunate because zero inflation was essentially forced upon them by economic circumstances rather than by the actions of the central bank.

Two Dogs said...

OSO, I have to disagree (almost to the point of violence, where's my damn dog?) in your opinion. Government regulation of the economy and the valuation of money is never a good thing. And there are so many examples of instituting price control measures (while never showing one that has ever worked) ruining everything, it doesn't need to be pointed out.

Market corrections, like the US is experiencing now are always healthy and it actually increases investment in the long run. People buy when the market falls, you know.

Point in case, the crashing economy that W Bush inherited from the rapist took very little time to correct with reducing taxes. REDUCING TAXES = LESS GOVERNMENT.

You know, just to point out how the economy is in the richest most stable country on planet Earth, well until the morons took over in January 2007. At some point in the near future maybe Japan can enjoy our standard of living and personal wealth, but there is the possibility that the government there will screw things up, too.

Coffee Bean said...


I've read through some of your "Absolute Price Stability," and... sigh, I already forgot what you titled it... but your idea on no taxes.

(anyone reading this can click on the link in OSO's comment and then in the second post down he has a link to the tax thing)

I did simplify the law of supply and demand and inflation because I have trouble wrapping my mind around a lot of this stuff. I do know some things (very little in the grand scheme of things) but I am trying to educate here... in a way that someone who has limited prior knowledge and doesn't really understand how it all works. I am currently trying to get a handle on the FED and on what is going on with Fannie Mae and Freddy Mac... because I don't really get it. I'm am very interested in the views of others on this and greatly appreciate your comments. For me, it is important to look at things from all sides when I am trying to figure something out. In this post, I looked at why some want to abolish the FED and return to the gold standard. I've been talking to my husband (who is an accountant) and he doesn't think that is realistic. We haven't had time to sit down and talk about it for me to get to the bottom of why he said that. I, honestly, am just gathering information right now.

All that to say... I felt like I was reading a science fiction novel when I was reading your posts. I am wondering... what is your background? Are you an economist? There is a great deal on your blog about the economies of other countries. I know nothing of what goes on in Australia... I gather it resembles England. Do y'all have the equivalent of our FED there? You obviously are in favor of centralized banking. I just am wondering... If there would to be "Absolute Price Stability," What would that look like in terms of free market? If the government bought everyone's mortgages... ? And there were no taxes...??? I believe we need some taxation to cover things like our roads, emergency services, law enforcement, etc. How would that be paid for? I just don't understand... Would the government just print money to cover all that stuff? And if there were such a government... what kind of choices would the people have?

I'm curious... I'm trying to figure out what it would look like if the FED were abolished... what impact would that have on our country... on individuals... on our government? I don't understand who is making the decisions to inflate... Doesn't congress have to approve? How does that work when we send other countries aid? Go to war? From what I understand, our country a gazillion dollars in debt... why not just print more money to pay for it? What is the deal with interest rates?

I don't know... as I look at this stuff and try to figure it out (I'd like to be able to explain it to my kids in a way they could truly comprehend... but that means I need to comprehend it myself)... it is like a big giant shell game. I want to know who is moving the money where and where it is coming from.

Coffee Bean said...

Okay... Two Dogs,

I've read through your last comment a bunch of times and I think I missed something (I told y'all I am NOT that smart). You said that in OSO's opinion ... "Government regulation of the economy and the valuation of money is never a good thing". I'm confused... what I got from OSO was different.

I am so confused. Somebody help me! Please explain slowly and with smaller words!

Two Dogs said...

What OSO is advocating is either Socialism in the manner of Great Britain and Australia, or Fascism in the case of price controls, which has never worked in the history of the world. Yes, they offer a temporary halt to business and runs on money, but you cannot maintain the stoppage. The show must go on.

What those that continue to advocate what Japan did eleven years ago fail to understand that Japan almost went belly up when the price controls were removed. The World Bank, which is financed by US citizens tax dollars for the most part, bailed them out.

Check out the price freezes that Nixon put in place and see how Fascism works in the very short term. Unemployment rose to a high during the last year of the Carter administration to almost 18%. And we are slowly moving the entire world market that way.

The only form of economy that has NEVER been tried is Capitalism. An unfettered opportunity to do business with whomever you choose. That was never the plan in this country, either, by the way. The whole concept of our government was the one that stated simply that government was neccessary but they would butt out of our lives. The printing of money was an intelligent thing because if we didn't have a standard, we would have to start some kind of idiotic thing like the European Union did. With ditching every bit of their own currency and starting the use of a new one, shackled to other countries that have never been stable. Don't you wish that we would do that with Mexico or Cuba?

And, the US government balked further around 1890 with trying to break up the trusts, and practically nationalizing railroads, basically causing the worldwide depression less than twenty-five years later. And follwoing it up in the late teens with the Communism creep that ultimately reached its apex with the Welfare Acts in the 1960's. Government intervention in the economy ALWAYS stifles productivity and wealth. Always.

Minimum wage laws are a great idicator of our stupidity. We raise the wage to help "poor people" which raises every single item in direct proportion and making everyone's salary that makes more than minimum wage worth less. Only the people making minimum wage have at best a zero sum gain when the minimum is raised, everyone else loses money in direct proportion to the hike in minimum.

If you care to see what the government can do to place the entire world in jeopardy, you only have to look at the fact that Chuck Schumer opening his big cakehole caused a run on Indymac. The Democrats taking control of the Congress caused every single price in our country to go up and jobs to start evaporating.

Government doesn't have to DO anything to ruin the economy, they just have to exist and say stupid things. To offer government even more control is suicide.

One Salient Oversight said...

Two Dogs,

Some comments:

1) My proposal for Absolute Price Stability is not about setting price controls. It is for inflation to be at zero. The two are different.

2) At my blog I have dabbled in an idea for instituting price controls on gasoline. the actual idea was to set prices higher than the market price in order to cut oil demand even further. The reason for this is my understanding of Peak Oil.

3) Your comments indicate that you are very much a small government advocate and are politically conservative. I, on the other hand, do see an important role for government in an economy. Your particular position has been the dominant one in the US since Reagan whereas economic and political thinking is now swaying back towards the centre.

One Salient Oversight said...

Coffee Bean, you said All that to say... I felt like I was reading a science fiction novel when I was reading your posts. I am wondering... what is your background? Are you an economist?

No I'm not. I like to call myself an amateur economist because I have no formal training except for a night course I didn't complete in 1995.

Since that time, however, I have been highly motivated to learn and I think I can give any Economics grad a run for his money.

Some of my posts have been published at an economics blog called Angry Bear. The guys at AB are generally econ PhDs, so the fact that I have been published there shows that at least some professional economists appreciate my thinking.

To read my contributions to AB, click here

As for my own personal background, click here.

One Salient Oversight said...

Do y'all have the equivalent of our FED there? You obviously are in favor of centralized banking.

Put simply, every currency has a central bank that looks after it. In the US it is called the Federal Reserve. In Europe it is the European Central Bank (which looks after the Euro). In Australia it is the Reserve Bank of Australia.

It is very important when trying to understand economics to look at the global picture rather than looking at the US only. The US is not the only place in the world where governments tax and spend and where central banks adjust interest rates and where people buy, sell, invest and borrow.

This is why it is so important in your economic understanding to come to terms with Fractional Reserve Banking. Since beginning my economic understanding in 1995 I have only just begun to understand this concept in the last 12 months. If you understand this you will understand how central banks work and how they can control inflation.

Put simply - money is created when commercial banks lend out the stuff to borrowers. Borrowers then use the money to buy things. The money then finds its way back to the bank, where it is deposited and then lent out again.

So money goes out of a bank, and then back in, and then back out, and then back in, and then back out... and so on. Each time the money comes back in and goes back out, the money supply increases.

I'll see if I can make it easy for you:

1. I have $1000 and I deposit it in the bank.
2. The bank then lends that $1000 out to Two Dogs.
3. Two Dogs then uses the $1000 to purchase a second hand car from Blbeamer.
4. Blbeamer then deposits the $1000 in the bank.
5. The bank adds up its deposits and discovers it has $2000 (my $1000 deposit and Blbeamer's $1000 deposit).
6. The bank then lends that $1000 out to Bill Clinton.
7. Bill Clinton then uses his $1000 to buy an air conditioner from The Jimmy Carter Air Conditioning Company.
8. The Jimmy Carter Air Conditioning Company then deposits the $1000 in the bank.
9. The bank adds up its deposits and discovers it has $3000 (my $1000 deposit, BlBeamer's $1000 deposit and Carter's $1000 deposit).

Now imagine that process going on trillions of times with millions of banks and you'll understand how money is created.

The role of the central bank is to limit just how far that money goes. When a central bank lifts interest rates or increases the reserve requirement, money is removed from the money supply. This has a deflationary effect. This is why central banks often increase interest rates to reduce inflation (Example: Paul Volcker's raising of interest rates between 1979 and 1983).

On the other hand, a reduction in interest rates or the reserve requirement ends up increasing the money supply and has an inflationary effect.

And the effect of monetary policy on the money supply can be immense. For every $1 a central bank removes from the economy, it prevents $5, $10, $20 or even more from being created by commercial banks. Conversely, for every $1 a central bank adds to the economy, it adds $5, $10, $20 or even more into the economy through commercial bank money creation.

Coffee Bean said...

Two Dogs left another comment but it went under the previous post and I think it belongs here.

OSO< Jimmy Carter was not good for our country and he istituted policies exactly like you are advocating. Intentions mean nothing, accomplishments do.

The amount of money in the system is irrelevent if everyone is unemeployed. Want to kill a bunch of folks and make everyone unemployed? Do exactly what you are advocating and you creata an economic environment like the one in Zimbabwe.

One Salient Oversight said...

Two Dogs,

You might like to change the way you debate and disagree with people.

This diagram should be helpful in giving you directions.

At the moment, all your comments fit in the "lower half" of the pyramid.

Two Dogs said...

Oh, and I also typed that one on my phone while sitting in the car, so that's why all the stupid looking stuff and misspellings. Sorry, but this is just so interesting to me, Coffee Bean.

OSO, tact during debate is probably not one of my strongest suits. I do apologize that I come off as less than understanding. However, I stand by my statements. I do not ignore history and try to incorporate into my memory, items that are sure-fire failures, such as your ideology. And trust me, "asshat" is the least of what I have been called, and I will try to be more understanding while completely discrediting your theories with historical performance and facts.

And I will certainly try not to reply to your comments anymore, unless they are just silly, much like the others.