Conservative commentators have been riling up their audiences recently with lots of talk about America ‘devaluing our money’ and expressing the horrors that befell us after the United States left the Gold Standard in 1972. Beck, as always, provides the well-crafted prototype of this line of reasoning.
What’s going on here? Let’s talk macroeconomic theory!
Money, as an abstraction, represents a sliver of the total productive ability of the economy. So, the value of the $20 bill in your pocket is ultimately determined by the productive ability of the economy divided by the total amount of money available at the moment.
Let’s assume that the productive capacity of the United States is stable. If North Korea manufactured a million $20 bills and handed them out to people on the street, the value of your twenty dollar bill would decrease. The term for this—when the growth in the supply of money exceeds the growth in the productive capacity of the economy—is inflation. If you have a wallet thick with $20 bills (you have lots of savings), inflation is working against you. If you owe money, inflation is great. Paying off the same debt (in dollar terms) requires less productive effort.
Assuming again the intrinsic productive capability of the economy is stable, let’s think through what would happen if trillions of dollars were suddenly evaporated—say by a gigantic retail bank failure obliterating checking accounts. Now, the $20 in your pocket represents a larger share of the economic output. That’s deflation. The winners and losers are opposite from inflation. The more savings you have, the better deflation is for you. If you’re indebted, you’re doomed.
Borrowing and saving are both critical for the health of the economy. Inflation discourages saving, deflation strongly discourages borrowing. Therefore, keeping a stable relationship between the productive output of the economy and the total money supply in the economy is the goal.
Here’s the rub: The productive capability of the economy is constantly in flux, and affected by an astonishing multitude of factors: New technologies, the availability of resources, monopolization of supplier companies for other companies, the weather, the overall enthusiasm of entrepreneurs, the number of work-capable people, the amount of labor each person can produce, the number of new ideas worth investing in, the state of infrastructure and on and on and on. Observing this, objectively, is beyond a difficult task; predicting the future productive state of the economy is even more difficult.
The old way to deal with this problem was to ignore it. Under the gold standard, the amount of money is fixed to be equal to the amount of gold in reserve. You could, at any time, exchange your crumpled dollar bill for a fixed amount of shiny metal. Therefore, the growth in amount of money was determined by how fast this one metal could be mined and refined from the earth. You can’t eat gold. You can’t make a home out of gold. And gold clothing is just tacky. The gold production rate is a poor correlate for the growth of the overall economy. The result—particularly during periods of rapid technological advancement in areas beyond metallurgy—were repeated cycles of catastrophic crashes. When an advancement dramatically increased the productive capacity of the economy, the money supply stayed relatively fixed—resulting in sharp, rapid deflation. The deflation stopped borrowing, stopping investment in new endeavors, crashing the economy over and over again. It was a terrible system, whose success depended almost entirely upon luck and faith in divine providence. Of course, Beck loves it.
Instead, we now attempt to measure as well as we can the state of the economy, and forecast how fast it is growing, and then ‘print’ enough new money (or, in theory subtract enough money) so that the ratio of the two stays roughly the same. While not perfect, it’s the far more rational way of dealing with the problem—harnessing mathematics, economic theory and plain-old empiric data.
(So much more after the jump…)
Assessing and predicting the current and future state of the dollar-based economy is the primary mission of the Federal Reserve. Based on these predictions, the Federal Reserve adds (and theoretically subtracts) from the total money supply—in an attempt to keep the ratio of productive capability to money stable. Hence, the Beckian feverish repetition of, “…. how much money we’re printing at the Federal Reserve.” They (the Fed) are ‘printing’ money to replace that lost by catastrophic (entirely abstract) investments and reflect growth in the productive capability of the nation.
In it’s arsenal—to accomplish this herculean task—the Fed collects data on almost every aspect of the economy. Among all this data is a calculation of the inflation rate of the economy. A basket of goods (representing a cross section of productive output of the economy) is priced out in dollar terms on a regular basis. The rate of change in the price for the collection of goods is used as a measure of the inflation rate. This measure is probably the best sign of how well the Fed has done their matching job. High inflation rates mean too much money supply, low rates of inflation (or negative rates, reflecting deflation) represent too little money is being ‘printed’. Since the economic crisis that started in 2008, the rate of increase in this measure has been historically low—despite the historically large increases in the money supply by the Fed. Based on this measure, the Federal Reserve hasn’t printed enough money, to replace that lost by bankers in their spreadsheets.
There are reasons to be concerned about run away printing of dollars by the Fed—but it’s worth noting that the Fed is a quite conservative organization. At a baseline, the Federal Reserve tends to err on the side of too little growth in the money supply—fitting with the catering to the needs of the wealthy before the needs of the working that dominates US leadership generally. For now, there is no reason underlying the hysteria of the right-wing commentators.
I only deal in Yuan.
I leave fake currencies like US dollars to the novices.
zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
Generally agree though I have a few points:
First, people do plenty of productive things for free or in exchange for stuff other than money. You never said otherwise but I just wanted to point that out.
Also it is interesting to think about the gold phenomenon. Its intrinsic value is much lower than its market value, which includes its psychological value I guess. People complain about the Fed devaluing money, but gold could be devalued as well, by someone finding a huge gold mine or something like that. We have (in theory) some control over the former but not much control over the latter, except that it’s just really, really unlikely.
Gold is about people wanting to find a ‘value store’ that can’t be devalued. This feeling of security is… just a feeling. On the other hand, the only thing more worthless than gold is fiat money.
I’m an econ geek and love this rather succint way of describing the relationship of money supply, inflation, the Fed, and the gold standard. One problem right now is that we’re tied to a de facto oil standard.
Will@1: that’s hilarious, even by your standards. The yuan has been officially pegged to the US Dollar for most of its existence, and even in its current ‘independent’ state has only been allowed to float off the dollar by trivial percentages.
I’ve been developing a theory that the problem is Financial Counterfeiting in the sense that now Wall Street will “print” stock, take a lot of it at penny prices for insiders, and then flip the rest on the open market (see the SLOG article on Insider Trading).
To me this is the same as those guys who go around to all the Pay n’ Saves with 20 bills, buying a candy bar and pocketing the $18 in change.
So productive people work for real cash, but then the Counterfeiters come and get them to trade it in for stocks in their 401ks. Eventually, the counterfeiters pull a Madoff, and they keep the real dollar while the Schmucks get the phony sawbucks.
As SLOG’s resident libertarian-economist-type, I endorse most of this analysis. My only caveats are:
1. While the Fed’s current massive money-printing (aka “quantitative easing”) is clearly not causing inflation now, there is some reason to be concerned (not panic, but be concerned) about the exit strategy. How will the fed know when to stop? Should the stop be gradual or rapid? Does it need to get the stop exactly right, or is it no big deal if it’s a little off? Will politicians try do interfere with the stop?
2. Even if the Fed’s management of the money supply is objectively exactly correct, if the bond market percieves them as decreasing the trustworthy-ness of U.S. debt (e.g. because they see the Fed being more influenced by the political winds than they would like and thus more likely to cooperate in a future inflating away of U.S. debt), all bets are off. If the bond markets stop trusting the U.S., the U.S. and the world economy are toast. Bond market perceptions are much more important than reality (which is why Bill Clinton famously said “I want to come back as the bond market.”)
3. The Fed has done a lot of unorthodox non-monetary stuff as well, like buying up troubled assets, or accepting them as collateral, when it had previously only accepted the most grade-A reliable assets. It thus has a much more questionable balance sheet than it did previously. How can the fed unwind those positions? What does it mean if it has to realize massive losses on those assets? (This feeds in to problem #2).
Chalk all these up to “things to worry about now, but potentially panic over in the future”.
It is incredible to me that someone could watch that Beck clip and come away from it with any kind of opinion. He essentially says, “Look at these NUMBERS! Wow, that’s a big’un!” He fails utterly to provide any kind of analysis that would make EITHER standpoint (for or against the Fed) at all understandable.
David Wright,
I’d love to get into a discussion of all three of your points. I started with the basics, and barely fit under 1000 words.
As someone who believes in governmental investment in society, I find myself thinking a lot about ways to engineer expansions in the productive capability of the economy by smart public spending. For all the reasons you’ve mentioned, I vastly preferred a public works projects-based stimulus. Alas, I am as ancient as a dinosaur in this thinking.
Beck was being sarcastic at the end when he said “This has never ever been done by anybody ever before,” right? I know it didn’t sound like sarcasm, but that level of ignorance just… tell me that was sarcasm.
This on gold buggery:
http://www.pkarchive.org/cranks/goldbug.…
…and as for the eeeeevil of printing money, well, I can’t find a good reference right now, but Google “zero lower bound” or “liquidity trap.” Or just start reading any of Paul Krugman’s stuff that you can get your hands on.
Or, at least, take a look at what the inflation rate is right now and decide whether you think our money is on the verge of losing all value…
Please, Will. Your idea of diversification is finding a Canadian Quarter in your mom’s purse.
“This wont affect us in 1000 years” I bet like 10 bucks global warming starts affecting us before then. its a shoe in
Oh, there is one thing in this post which I do think is pretty much just plain wrong. There is, as far as I know, no evidence that recessions were any more common or any worse under gold standard regiemes than under fiat currency regiemes. And there is very clear evidence that, historically, fiat currency regiemes have been much, much worse at preserving the value of money than gold standard regiemes. You can see the U.S record at http://www.whichwayhome.com/index.php/go… (yeah, it’s a gold bug site, but the numbers are correct and it’s what Google found first). The world-wide record is even worse. There are some things that floating rates do better, but preserving the value of money is not one of them.
Of course, there is one excellent reason why certain individuals might be encouraging investors to put their money into the safe haven of gold: If they themselves had purchased gold when it had a relatively low market value. That way as all the people they encourage to buy gold (say through their nationally-syndicated television and radio programs) enter the market, gold’s value would inflate, allowing them to sell theirs at a very high price. There’s a word for this kind of scheme, where you trick late investors into funneling money to early investors, but I can’t remember it.
I think it rhymes with “Fonzie.”
You know what they say: smoke and idiots love the gold standard.
I appreciate your responding, Jonathan, and I appreciated your article. Please don’t take my remarks @14 as mean-spirited. About public works stimulus, I would point out:
1. It does not do bank balance sheet repair, which is what you need if you want to re-start lending.
2. The line between stimulus and a monetary expansion is indeed fuzzy, but if you erase it entirely you are jeprodizing your own argument that what the fed is doing is simply objectively correct monetary policy, not “goosing” GDP.
3. A lot of the laws that progressives like most have, as a side-effect, made public works stimulus much harder. In 1935, you could hire a bunch of unskilled laborers and tell them to start building whatever tomorrow. Environmental impact statements, growth management processes, union work rules, exacting engineering standards and such make that basically impossible today.
David@17: I think one of the odd points of agreement between most progressives and libertarians back during the disaster of 2008 was that “bank balance sheet repair” was precisely not what was needed. Many soundly run banks were unaffected by the mortgage balloon popping, and could presumably have bought the assets of the destroyed banks and brokerages at healthy discounts and then commenced lending, the market clearly still being there. But that would have meant that executives at Citigroup and Goldman might have had to drive their own cars, and clearly that could not be allowed. We’ll be paying for that decision for generations, I’m sure.
(I suspect that most of us would also say that the obstacles to quickly spinning up public works projects you mention as point #3 are correct but generally worth it, with greater or lesser willingness to allow as to the necessity of reform on some points as taste dictates…)
In Life Inc Douglas describes a time in humanities past where currency doesn’t hold it’s value, as such people spend almost everything they earn, creating more jobs and creating a much better life for themselves and society. It wasn’t until this gold “standard”, where rich people decided to horde as many resources for themselves forever that we got all these crashes. It’s only a crash because working people get fucked, working people only get fucked when they don’t get paid (or in our future, have promissory notes they can’t afford to pay back but are legally obligated to, which is worse than not getting paid), they can’t get paid when all the wealth is concentrated at the top. It’s never worked that way ever in the history of humanity, it’s always taken radical government action to destroy their empires that keep us down.
By extension the fed printing more money out of thin air (as some awesome commenter before mentioned “quantitative easing” bullshit they try to call it) helps DESTROY the working class because people who make money off just having money get richer. It’s similar to how the bailout worked, where we give rich people a whole bunch of money hoping they’ll help the economy, but they already have everything they need, so they throw it in Tbills or a savings account (because the economy looks like it’s going to crash again, again). The fed prints them the money at almost nothing, then they make a 4% return off my income tax. This is the system I’m supposed to defend? This is what I’m working for? Fuck that noise dude. I’m not all right wing ‘omg destroy the federal reserve’, but that’s OUR bank, making decisions with OUR money that fuck me royally and make the lifestyle of the rich and famous all that more rich. Glen Beck may not be right, but his initial gripe about an out of control fed that prints too much money is spot on, but thinking we can return to the gold standard is laughable. In fact the gold standard would cause way too many problems, it’s bubbling now, what do you think is going to happen to it when it’s being used by everyone?
David: @14.
I’d say, and tried to imply in my original post, that being on the gold standard is more deflationary in general–perhaps a way of saying the gold standard tended to force the currency to maintain its current value.
What I’d argue is (a stable rate of some) inflation is overall better for the economy than even a risk of deflation. So, a slow, steady, decline in the value of the dollar is actually an overall benefit for the economy.
What was the 30 Rock joke this week? The first generation works hard. The second generation studies hard, and innovates. The third generation snowboards and does improv.
Deflation favors people living off generational wealth. Inflation favors those borrowing to bring new ideas into the world. I’d rather empower the latter. Call it my Bill Gates over Paris Hilton theory.
@17. They are not “goosing” GDP. There is no threat of inflation while there is so much unused capacity in the economy. We are way way below the long run growth trend. Printing money and cutting interest rates will boost demand and get us closer to full employment and capital utilization. The problem right now is too much saving. A healthy fear of inflation will force money off the sidelines in search of better returns. This is literally textbook macro.
“No Mr. Bond, I expect you to DIE!”
” For now, there is no reason underlying the hysteria of the right-wing commentators.”
“For now”?
Try, “All the fucking time.”
@18 “We’ll be paying for that decision for generations, I’m sure.”
Actually, the Fed made a $1.4 billion profit on its investment (aka “bailout”) in Goldman Sachs, and it has made billions more from other banks.
@24: Two things: First, it’s not just a matter of whether the bailout eventually returned a profit, it’s the long-term effects of letting Goldman and Citigroup know (via actions and cold hard cash) that they can rely on the Fed to bail them out of any major problem they find themselves in: you can bet your last dollar that they’ll come back to the trough sooner rather than later. Second, if you actually believe the accounting that shows a profit, I have some prime real estate in Florida I’d like to sell you.
@17: You mean all those things that make is so building that are built will last, people will be paid a fair wage, people working will be safer, and the enviroment would be fucked over?
Yeah, what a horrible mess the liberals have made.
@seandr: totally! I was going to point that out as well. We are making profit back from the loans we gave them. The bailout money was a loan, and few people understand or remember this fact.
It’s worth noting that there are more serious implications of deflation than just “strongly discouraging borrowing.” That sounds almost good, or at least not catastrophic.
The real problem with deflation is that it discourages *spending*, which reduces demand, which depresses prices, which leads to further deflation. It’s a death spiral that reduces overall economic output because you’re always better off if you wait to spend money. And your neighbors are waiting to spend their money, so you get less income. Most economists see deflation as a much more serious problem than excessive inflation (though both are bad, certainly).
So, when the Fed prints more money, who gets it? Does it just mean the government has more money to spend? How does it enter the market?
And on that note– is the printing of money a literal thing these days? Or do they just decide there’s more money in the system? I mean, I rarely use cash for any transaction over $40. Most movement of money is just digits in bank accounts.
First, let me point out the US economy is NOT stable.
Never was. Never will be.
Therefore, you start off by breaking one of your key assumptions. Most failed economics analysis is directly caused by using models (economic laws) and violating one or two or three of the PRECONDITIONS needed to use them.
Like Supply Side theory, which is based on a supply demand curve that MOVES AS TIME PASSES – if govt could react to the market in MINUTES instead of YEARS, it might have a point, but since it does NOT, using the theory is pure insanity.
Virtually all Republicant economic concepts are even more flawed than that.
In short – they are LIES. DAMNED LIES. Period.
@28: I’d be really interested in the answers to those questions, as well.
The two largest producers of gold are South Africa and China. Why would we want them to have any role in dictating our monetary policy?
Stacey @28, Sly @30:
Most immediately, sellers of government bonds get it. That’s because the way the fed “distributes” the money it creates is by buying government bonds. So if I hold an IOU from the government, I can sell it to the fed and they will pay me in money that they simple created. And yes, the transaction is electronic, not cash; they take the bond from me and credit my bank account with its value, which deposit my bank will recognize because it comes from the fed.
Effectively, though, it’s the government that profits from that operation, because they got “real money” from me when they sold me the bond, and then the fed, which is just another arm of the government, paid me back with “made up money”. So money creation is a way that government can buy stuff without having to collect taxes to pay for it.
At one step further removed, we all get that money, because the bond-seller puts the money in a bank account, so the bank is willing to lend more, and the people who get those loans deposit that money in their bank accounts, so their banks are willing to lend more, etc. This is called the “multiplier effect”. (It’s not the same as “trickle down”, because it doesn’t assume that the bond-seller spends any of that money, only that he deposits it in a bank account.)
Of course, none of this changes the productive capacity of the whole society, so whatever extra money is out there is still bidding for the same set of goods and services. Does it change who ultimately gets those good and services? If everyone involves expects the money creation and adjusts their negotiating stance accordingly, then no — the nomial price changes but the ultimate distribution stays the same. If the money creation is unexpected, then yes: the government gets more and its creditors get less.
@7 –
1. The Fed will know when to stop printing money when inflation rises above the target rate.
2. Right now there is no indication whatsoever that the bond markets have anything less than total trust in the financial soundness of the US government. Trust is measured by interest rate, so that bond buyers demand higher interest rates from borrowers they trust less and lower interest rates from borrowers they trust more. Right now the interest rate on Treasury Bills is very, very low – lower than any other form of debt, indicating that the US government isn’t merely considered trustworthy, it’s the most trustworthy borrower in the whole wide world!
3. The Fed isn’t like an ordinary bank. It can bail itself out by printing money.
And finally – none of these worries are important compared with the massive damage being done to our nation and its people by the continuing slump. Right now our nation’s households are deep in debt and are tightening their belts to try to pay off those debts. Their reduced spending means less income for other people, who are also trying to pay off debts, which leads to more belt tightening, which spirals endlessly and makes it harder for everyone to pay their debts and is causing our continued situation of massive unemployment.
All those unemployed workers are not producing stuff, and would have produced stuff if they were employed. All that lost production is something that can’t be recovered – lost time is lost forever. More pernicious, the longer a worker stays unemployed, the less employable he becomes. His skills atrophy. His resume has a giant gaping hole in it. If he loses his home and ends up on the street, he’s not going to present well at an interview and his health will deteriorate. This loss of employability is a loss to the whole economy that will persist even after the slump is over. These are people we’re talking about, people with feelings and hopes that are being crushed.
It’s not a question of whether we can afford to act. It’s a question of whether we can afford NOT to act. And I say we must act! Whatever other problems are created by the action are tiny compared to what’s happening now, and can be dealt with once the economy is strong again. Do whatever it takes to end this slump!