Print money and create inflation?

neverdespairgirl

kennyboy66 wrote: »

I'm only surprised you didn't throw Jewish financiers in for good measure.

It is their fault. After all, OH put £35k in Icesave.

amcluesent

>There are 101 flavours of communist, many of whom see the others as not being communist<

There's always a healthy debate between the Islington Communist Collective and the Islington Collective of Communists. I've seen many a pint nearly spilt.

dopester

Testing in white.

kennyboy66 wrote: »

The stock market crash in 1929 had already been preceded by a downturn in economic activity. OK - maybe so.

Read 'Friedman's monetary history of the US' if you seriously believe that the money supply had nothing to do with the depression. Cutting interest rates is a sticking plaster in the circumstances. I believe the Fed did as much as it could do, but couldn't save all the enterprise that had grown and expanded to service the boom and needed to restructure with slow debt liquidation to take place.

And that the Fed had to stop short of determined and disasterous reflation, to wipe out all good money, blocked in part by the power of the bond markets and all those who wished to preserve their wealth (not just the ultra rich.) but people like me today, and people with private savings for their pensions after a lifetime of hard work.

Here is what Friedman himself said.

"The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933 ... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government."

There are good statistics on the exact money supply contraction, the number of banks that failed and the response in increasing the reserves of those that survived.

Have you actually read "The road to serfdom" ?
Hayek specifically argues that there is a role for the state when it comes to using monetary policy. No; I haven't.

In his own words.
"nothing has done so much harm to the liberal cause as the wooden insistence of liberals on certain rules of thumb, above all the principle of laissez-faire capitalism" -- Thanks - so I guess everything would have been better by flooding the money supply to every company and every person that needed bailing out and given money for nothing? There are limits. That just destroys everything.

We expect and hope that the authorities will submit to the dictates of the market, and take steps to restore the economy and the government to solvency. This would mean deflation - letting the bad debt be liquidated.

This is written optimistically, on the assumption that the American constitutional system will prove stable enough to hold together, in spite of the adverse megapolitical trends. Deflation will prevail over inflation. Creditors will prevail over debtors. Financial assets will be selectively repudiated through default, not obliterated by inflation.

This optimistic reading does not depend upon creditors being more numerous than debtors, but on markets being more powerful than governments. The power of the markets, however, is a long-run power, a power that asserts itself over decades.

The view that the power of the markets will prevail over the welfare state's policy of socializing the losses is a guess based on the cycles of history, current megapolitical conditions, and the magnitude of debts.

A concerted attempt by political authorities to override market disciplines and write down debt through inflation would lead, in the extreme, to the disappearance of credit altogether - an outcome that would doom a modern political economy.

The logic of this is clear. Of course, one cannot be too sure of applying logic to politics. The fact that a policy could be destructive does not preclude it from happening. And it is also true that destruction can take different forms.

Lord Rees-Mogg leans more to the view that governments will press blindly ahead with inflation, in spite of the destruction that would involve. James Dale Davidson believes that the costs of ruthless inflation will be higher and more obvious early in the process, thus short circuiting the reflation. But those are both weightings of probabilities divorced from the knowledge of the actual details of the immediate market setting in which the decisions will be made.

Political authorities will surely attempt to lighten debt loads by depreciating the value of money. But the market will understand this even better than the politicians. A hunter with a visible snare catches few rabbits. Creditors will seek to stay one step ahead of the authorities, to avoid being tagged with the losses through inflation or currency depreciation.

The lesson of September 1992 is a re-affirmation of a central theme: markets are more powerful than governments. The European Exchange Rate Mechanism cracked apart because the Bank Of England was no match for George Soros. Even with tens of billions of Deutsch marks to spend defending an artificially high value of the pound, the British government was obliged by the market to beat a humiliating retreat. Given similar circumstances, it would happen again.

The major economic drama will be the struggle between the market and government over the liquidation of debt. Political authorities will prefer to wipe away debt surreptitiously through inflation. But to inflate away bad debts also means inflating away good credits.

Market participants will seek to preserve the value of their assets denominated in money. To the extent that they succeed, they will make it harder to repay excessive debt in cheap money, and thus make the system more vulnerable to overt default and deflation.

As monetary policy is loosened, in increasingly desperate efforts to reliquify the economy, the market may force a deflationary response. Inflationary depression would wipe out the financial economy, and probably lead to the overthrow of the government. In effect, the capital value of the Constitution would tumble. This would expose society to the full measure of destabilisation implied by the present power equation of the world. The megapolitics of devolution could take hold, threatening to make the United States a Northern Hemisphere, balkanised version of Argentina.

Deflationary depression would write down the value of the tangible assets that are the collateral for many loans in the banking system, but it would increase the value of sound financial assets, including the value of government debt. Deflationary depression would expose social conflicts papered over by welfare state spending.

You can expect additional currency crises and worse. Governments facing the need to finance massive structural deficits due to the slowdown in economic activity may find that the markets can set the price of funding high enough to offset any stimulative gains from inflation. If so, there will be no alternative to direct debt liquidation, and the second, deeper stage of depression.

Watch bond prices carefully. There is a limit to everything, including the good credit of governments. When theirs is exhausted, even governments of the richest industrial countries will face the dilemma Sweden answered with 500 percent interest rates and deep cuts in government spending. When it appears that authorities are most determined to inflate depression away that very perception could put the economy on the verge of again slipping into the deflationary vortex.

Deflation and hyperinflation are not remote polar opposites, but the male and female of the same species. You should prepare yourself for either outcome, which means remaining alert to the dangers of both.

Either form of depression would greatly curtail the availability of credit, send the real demand for commodities tumbling, and depress living standards in real terms. The danger of deflation, of course, requires the greater thought and preparation, because it represents a reversal of the trend.

-William Rees-Mogg & James Dale Davidson (1994)

kennyboy66_2

I believe the Fed did as much as it could do, but couldn't save all the enterprise that had grown and expanded to service the boom and needed to restructure with slow debt liquidation to take place.

It is widely accepted that they didn't do as much as they could, the just sat on their hands as bank after bank went bust.

And that the Fed had to stop short of determined and disasterous reflation, to wipe out all good money, blocked in part by the power of the bond markets and all those who wished to preserve their wealth (not just the ultra rich.) but people like me today, and people with private savings for their pensions after a lifetime of hard work

It was exactly people with private savings who were wiped out unless all your money was in treasury bonds, or you were lucky enough to be in the right bank.
It was nothing to do with the power of the bond market - Herbert Hoover & the Fed just did nothing and hoped for the best.

dopester

kennyboy66 wrote: »

I believe the Fed did as much as it could do, but couldn't save all the enterprise that had grown and expanded to service the boom and needed to restructure with slow debt liquidation to take place.

It is widely accepted that they didn't do as much as they could, the just sat on their hands as bank after bank went bust.

And that the Fed had to stop short of determined and disasterous reflation, to wipe out all good money, blocked in part by the power of the bond markets and all those who wished to preserve their wealth (not just the ultra rich.) but people like me today, and people with private savings for their pensions after a lifetime of hard work

It was exactly people with private savings who were wiped out unless all your money was in treasury bonds, or you were lucky enough to be in the right bank.
It was nothing to do with the power of the bond market - Herbert Hoover & the Fed just did nothing and hoped for the best.

I disagree with many modern interpretations about mistakes made by Hoover and the Fed. Somehow it seems to have been badly distorted - although I agree with you about money in treasury bonds and the right banks.

Flooding out the system with money, beyond what was already done, solves what exactly?

Is this all that would have been needed in your view.... make sure everyone had cash to keep on spending?

My view is that deflation is wholly more complicated, and much can't easily be combated one the dynamic process has begun - after a massive boom.

It is not whether government have the power to print money. It is "When do the benefits of printing money exceed the costs?" If political authorities could benefits only from inflation, and not be harmed, they would obviously print more money in higher denominations than they do.

Warning Signs of Deflation
- A fall in loan demand in the face of falling interest rates.

This last point is particularly important. The Fed immediately dropped the discount rate in 1929 from 6 percent to 5 percent. Within two weeks, the rate had been pushed down to 4.5 percent. By March 13 of 1930, it stood at 3.5 percent. In the weeks after the crash, "the system expanded credit enormously."

Nonetheless, after the crisis subsided, falling interest rates were not accompanied by a growth of money aggregates. A repeat of this would be an early confirmation of a coming deflationary collapse.

In April 1930, President Herbert Hoover signed a strategic arms treaty that was to have "lifted the burden of militarism from the backs of mankind."

Our own governments of today should consider ways of cutting back heavy public spending as well given the strains on the public purse.

The idea that government can easily interrupt or suppress economic cycles is more a civic myth than a fact. The claim made by John Kenneth Galbraith and others that the Great Depression emerged because of the U.S. government in 1929 was content to allow the market to operate without intervention is simply untrue.

Indeed, it is remote from the facts. President Herbert Hoover intervened vigorously but without success. Even a massive stimulus program and an "easy money" policy that led to negative T-bill rates in 1933 did not prevent deflation.

It is all too simple to think that central banks have magic powers. They don't. They can create liquidity by creating debt. But this is not the same thing as creating capital. Any time a central bank monetizes an asset by buying it, in essence with printing-press money, it also creates a liability. Only the market can create capital by valuing assets above liabilities. Turning on the presses at a higher speed destroys more wealth than it creates.

It is far from obvious, however, that the Japanese authorities are in any sense more nimble or competent than their counterparts in the United States were after 1929. In fact, their behaviour in the two years following the crash makes an unfavourable comparison with the dramatic action undertaken by Herbert Hoover in a fruitless attempt to stabilize the American economy.

Hoover was a genuine student of the business cycle, and probably better informed about the intricacies of the economy than any other world leader of this century.

Contrary to the song and fable, Hoover did not sit on his hands as the economy imploded. He sought vainly to reverse the collapse, using ever method available to the Japanese today, including pouring concrete. Hover organised the equivalent of an eighty-billion-dollar stimulus package in today's terms. [1994]. He started putting it together within a month of the stock market crash in 1929.

Ironically, news in August 1992 that Japan will pour more than Y10 trillion into infrastructure spending provided another haunting example of history repeating itself. Ten trillion yen is roughly the equivalent to $80 billion. The attempt by the Japanese authorities to suppress the earthquake of depression has led them to follow, almost pace for pace, in Herbert Hoover's footsteps.

But note they are about two years slower off the mark than Hoover was. As Christopher Wood, Japan Finance Editor of The Economist, put it, "The Japanese make Herbert Hoover look like a 100 metre sprinter."

Time will tell whether it is as easy to stop deflation as the Japanese and others now expect. The crucial question is still the same one that economic historians have argued about ever since the 1930s. It is whether the deflation of the 1930s was really a policy mistake that could have easily been corrected by a more determined policy of monetary ease - or a more highly determined follow-on effect of the inflationary boom.

Our guess, which is not orthodox opinion, is that deflation was not a mistake but a consequence. When all is said and done, the Japanese authorities will be no better able to roll back the tide than Herbert Hoover, who in spite of his bad press was one of the more able men of this century.

- William Rees Mogg & James Dale Davidson (1994)

baileysbattlebus

kennyboy66 wrote: »

British Airways
BP
BAE
British Gas
The electricity companies
The water companies
a host of others.
TSB (quasi public I suppose)

All made profits in the years before they were privatised.
This is not to say that those companies should not have been privatised.

Even the Royal Mail has made a profit in some years (not a great example I know!).

Maybe the correct question is which public bodies deliver a service cheaper than that which could be done by the private sector. Impossible to give an answer really when it comes to health or education.

You forgot NATS - a PPP made profits 2007/8 - they were profitable before PPP and they still are. It is part owned by the Airline Group, the Government and the employees who have a 5% stake. I think they pay dividends to the government - who are the major shareholder - shares cannot be sold on the stockmarket. If an employee wants to sell his shares they go into a pool of employee shares that another employee can buy - and they must sell them when they retire or leave NATS.

My OH has worked for NATS for nearly 30 years - and his one big gripe with this government is the part privatisation of NATS (when they promised they wouldn't) and the splitting up of the CAA.