22 Sep 2018

Austrians Are From Mars, Market Monetarists Are From Venus

Market Monetarism, Scott Sumner 32 Comments

What we’ve got here is failure to communicate. Somehow, Scott Sumner thought Austrians back in 2009 were claiming that the malinvestments of the housing boom “would remain empty for decades.” You can skim the comments at the link to see the twists and turns when I tried to get to the bottom of this assertion.

(Also, frequent commenter baconbacon has devoted a blog post to answering Sumner.)

On the flip side, I apparently don’t understand Market Monetarism. Scott quotes a news article reporting this about Janet Yellen: “Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.”

Now, based on my dutiful reading of Scott from way back in 2009, I would’ve predicted that Scott would go ballistic in reading these lines from Yellen. Doesn’t she know that the recent experience with near-zero interest rates was showing how TIGHT money had been, since 2008? In general, low interest rates–particularly if they are anticipated years in advance–are evidence in favor of tight money, not loose money. If Yellen is promising markets that nominal interest rates will be near-zero years ahead of time, and for a long duration as the economy responds to the next crisis, then she is actually telling markets that money will be way too tight.

But, apparently my understanding of Market Monetarism is wrong, because Scott was very happy at Yellen’s remarks, going so far as to say they remind him of his license plate:

32 Responses to “Austrians Are From Mars, Market Monetarists Are From Venus”

  1. Transformer says:

    On the Yellen thing (and at the risk of stating the obvious):

    Sumner’s plate stands for NGDP Level Targeting and Yellen when she talks about ‘let[ing] a hot economy make up for lost time’ is endorsing the LT part of his plate, not the NGDP part.

    • Bob Murphy says:

      I get that, Transformer, but by the same token, if I say, “We should have an extra long dose of the gold standard after a recession, to make up for the prior mistakes in Fed policy,” I doubt Scott would say, “Winning!”

      • Tel says:

        Maybe I should get “PPIACO” on my numberplate.


        Does look a lot like they are keeping it between 200 and 210 which makes the USD approximately a commodity money (not same as gold standard but still good if you have a reasonable basket of basic commodities, including PM, Dr Cu, fossil fuels and companions.

      • Transformer says:

        In the language of MM isn’t a commitment to LT a way the CB can bypass the ZLB without actually doing any heavy lifting ? I’m thinking of that Chuck Norris stuff that used to be popular (for example https://www.econlib.org/archives/2015/05/in_1987_the_fed.html).

        • Bob Murphy says:

          Yes Transformer but if Chuck Norris promises to give you a neck massage (rather than kick your a$$) then the analogy breaks down, right? Scott thinks zero interest rates (esp. years on end, in the midst of a crisis) are a sign that money is tight. So if the Fed is promising to keep that regime in place for a long time, that’s not the same as the Fed promising to “do whatever it takes” so that in practice it doesn’t need to do much.

          • Transformer says:

            Friedman: “If there is evidence of lots of ass-kicking by Norris that is a sign that he’d let discipline get too lax, not that discipleship was tight.”

            Yellin: “If we ever get to a point where discipline is so lax that even maximum ass-kicking won’t fix the problem, then I want you all to know that ass-kicking will continue into the future until all ill-discipline from the present has been punished”

            Sumner: Yellin has finally come to realize that even the threat of extra (maximum if needed) ass-kicking in the future can reduce the necessity of real ass-kicking both in the present and in the future”

            Murphy: Those Market Ass-Kickers – one moment they are telling us that lots of ass-kicking is a sign of ill-discipline , and now they are supporting someone who says that threatening maximum ass-kicking in the future would be a good thing ! Obviously that must mean they support sustained periods of ill-discipline !

            • Bob Murphy says:

              No Transformer you’re not making the analogy right. If Yellen had said, “I think we should promise to let (price) inflation run hot for a few years after the next downturn,” then that would make sense, and I could see Sumner thinking that was kinda sorta NGDPLT. But that’s not what she said; she said keep nominal interest rates really low, which Sumner has spent years telling the world is evidence of tight money.

              Let me try it this way, Transformer. Suppose Yellen had said, “If we ever hit the ZLB again, the Fed should promise to let monetary policy run cold for a long period.” Would that warrant a picture of Scott’s car?

              • Transformer says:

                Would you agree that :

                ‘“I think we should promise to let (price) inflation run hot for a few years after the next downturn,” ‘


                ‘“I think we should keep interest rates below the natural rate after the next downturn”

                are functionally the same thing in MM language?

                if so would you agree that the latter is what Yellin had in mind ?

                If so, then bringing in Friedman’s chestnut about interest rates and tight money seems to me to be beside the point. The (threatened) future lower rates that are needed to implement level targeting in the Yellen case are qualitatively different from the (actual) low interest rates associated with juicing the economy in a way that will eventually backfire and lead to a recession in the Friedman case.

              • Transformer says:

                Should rather have said:

                “the (actual) low interest rates associated with attempting to recover from a recession caused by too tight money in the Friedman case.”

              • Transformer says:

                And I think my analogy does work once you factor in that lax discipline = tight money and vice versa, which does make it bit confusing.

              • Bob Murphy says:

                I don’t want to get more in the weeds about your analogy, Transformer. I will concede that I don’t know exactly how to reproduce Scott Sumner’s thoughts on the natural rate of interest as it relates to his frequent quotation of Friedman. I agree that Scott says the Fed needs to push the market rate of interest below the natural rate in order to have loose money, but I hope you will agree that Scott also says very low interest rates are a sign of tight money. So when we observe the Fed pushing rates down to zero, I guess Scott would say it’s tight and loose at the same time.

              • Transformer says:

                I would concede that Sumner does appear sometimes to use this “low interest rate means tight money” thing as a trap to catch the unwary, while being a bit inconsistent himself – so I can sort of see where you are coming from.

        • baconbacon says:

          Wait really, SS said this?

          “In 1987 Greenspan did not rescue the economy, nor did he store up future problems by bailing it out with lots of money printing. He did almost nothing other than keep on doing what he was already doing, and it worked.”

          Because he is on record saying that the Fed’s inaction in the summer of 2008 is what precipitated the crisis.

  2. Bob Roddis says:

    Any type of violent intervention must be based upon a claim that a peaceful voluntary society is a recipe for disaster and requires violent intervention. Sumner’s proposals amount to violent intervention. Demand that he demonstrate the failure of a voluntary society and the urgent necessity for violent intervention to correct those alleged failures.

    • scineram says:

      The demonstration is a voluntary society never having existed.

      • Bob Roddis says:

        You are so right. I never thought of that. Since we can never totally stop war, rape and pillage, let’s quit worrying about it.

      • Major_Freedom says:

        That isn’t a demonstration of a theory of markets, but a historical happenstance.

        By that logic, pre-1865 a person could say “The demonstration that force is needed against black people is because slavery has always existed.”

      • Dan says:

        That’s literally a logical fallacy.

      • guest says:

        “The demonstration is a voluntary society never having existed.”

        Forty Centuries of Wage and Price Controls: How Not to Fight Inflation

        Chapter 1: The Ancient World

        “Even in the classical period of Chinese history, however, there were a number of perceptive economists who saw the futility of government regulation of prices as a means of controlling inflation. In fact, they placed the blame for high prices squarely on the shoulders of the government itself. The economist Yeh Shih (A.D. 1150–1223), for instance, anticipated by several centuries the principle known as Gresham’s Law in the West.

        ““The men who do not inquire into the fundamental cause,” he wrote, “simply think that paper should be used when money is scarce. But as soon as paper is employed, money becomes still less. Therefore, it is not only that the sufficiency of goods cannot be seen, but also that the sufficiency of money cannot be seen. ”

        “Another economist of about the same time, Yuan Hsieh (A.D. 1223), saw the principle even more clearly. …”

        Chapter 3: From Medieval to Early Modern Times

        “In the sixteenth century misplaced economic controls were decisive in determining the fate of the most important city in what is now Belgium. From 1584 to .585, Antwerp was besieged by Spanish forces led by the Duke of Parma who was intent on maintaining the rule of the Habsburg Empire in the Lowlands. Naturally, during a siege, food quickly becomes a scarce commodity and prices accordingly rise. The City Fathers of Antwerp reacted as many others in their position have done before and since: they passed a law fixing a maximum price for each item of food. Severe penalties were prescribed for anyone who attempted to charge the market price.

        ““The consequences of this policy were twofold,” according to the historian John Fiske. …”

        “… no merchant would run the risk of having his ships sunk by the Duke’s batteries merely for the sake of finding a market no better than many others which could be reached at no risk at all. …”

        “… the enforced lowness of prices prevented any general retrenchment on the part of the citizens. Nobody felt it necessary to economize. So the city lived in high spirits until all at once provisions gave out. …”

        “… A similar but even worse disaster, made more costly still by government bungling, occurred in the Indian province of Bengal in the eighteenth century. The rice crop in 1770 failed completely and fully a third of the population died. A number of scholars attribute this disaster primarily to the rigid policy of the government which was determined to keep the price of grains down rather than allow it to rise to its natural level. …”

        “… For at least once in human history, however, government did learn by experience. Ninety-six years later, the province of Bengal was again on the verge of famine. This time the procedure was completely different, as William Hunter relates: …”

        “… The experience of Bengal, which had two failed harvests of major proportions within a century, provided a laboratory for testing the two policies. In the earlier case, price-fixing was enforced and a third of the people perished; in the latter case, the free market was allowed to function and the shortage was kept under control.

        And on, and on, and on.

  3. Major_Freedom says:

    With all due respect Sumner after all of these years has PROVEN himself to be against true understanding of Austrian economics because he lacks the intellectual courage to separate ideas that are self-serving and ideas that are true.

    He doesn’t want to understand because his own career rests on being ignorant of it.

    Sumner is not someone who is trying to understand it, he is trying to give himself excuses not to understand it

    He hasn’t improved his understanding in almost 10 years.

    Too bad because now he has to deal with something even worse.

    There is a worldwide awakening taking place about a horrible truth about the people in charge of all money.

    The people Sumner is wasting his time saying should press CTRL-P at “this” rate rather than “that” rate, are PRACTISING SATANISTS WHO RITUALISTICALLY MURDER CHILDREN.

    I wish it weren’t true. I wish it was all a nightmare only. It’s real.

    Everyone calling themselves economists who research and study money should put these mechanics questions aside as there is something so much more important, including the very lives of economists and us all.

    Afghanistan: Bank of Afghanistan
    Albania: Bank of Albania
    Algeria: Bank of Algeria
    Argentina: Central Bank of Argentina
    Armenia: Central Bank of Armenia
    Aruba: Central Bank of Aruba
    Australia: Reserve Bank of Australia
    Austria: Austrian National Bank
    Azerbaijan: Central Bank of Azerbaijan Republic
    Bahamas: Central Bank of The Bahamas
    Bahrain: Central Bank of Bahrain
    Bangladesh: Bangladesh Bank
    Barbados: Central Bank of Barbados
    Belarus: National Bank of the Republic of Belarus
    Belgium: National Bank of Belgium
    Belize: Central Bank of Belize
    Benin: Central Bank of West African States (BCEAO)
    Bermuda: Bermuda Monetary Authority
    Bhutan: Royal Monetary Authority of Bhutan
    Bolivia: Central Bank of Bolivia
    Bosnia: Central Bank of Bosnia and Herzegovina
    Botswana: Bank of Botswana
    Brazil: Central Bank of Brazil
    Bulgaria: Bulgarian National Bank
    Burkina Faso: Central Bank of West African States (BCEAO)
    Burundi: Bank of the Republic of Burundi
    Cambodia: National Bank of Cambodia
    Came Roon: Bank of Central African States
    Canada: Bank of Canada – Banque du Canada
    Cayman Islands: Cayman Islands Monetary Authority
    Central African Republic: Bank of Central African States
    Chad: Bank of Central African States
    Chile: Central Bank of Chile
    China: The People’s Bank of China
    Colombia: Bank of the Republic
    Comoros: Central Bank of Comoros
    Congo: Bank of Central African States
    Costa Rica: Central Bank of Costa Rica
    Côte d’Ivoire: Central Bank of West African States (BCEAO)
    Croatia: Croatian National Bank
    Cuba: Central Bank of Cuba
    Cyprus: Central Bank of Cyprus
    Czech Republic: Czech National Bank
    Denmark: National Bank of Denmark
    Dominican Republic: Central Bank of the Dominican Republic
    East Caribbean area: Eastern Caribbean Central Bank
    Ecuador: Central Bank of Ecuador
    Egypt: Central Bank of Egypt
    El Salvador: Central Reserve Bank of El Salvador
    Equatorial Guinea: Bank of Central African States
    Estonia: Bank of Estonia
    Ethiopia: National Bank of Ethiopia
    European Union: European Central Bank
    Fiji: Reserve Bank of Fiji
    Finland: Bank of Finland
    France: Bank of France
    Gabon: Bank of Central African States
    The Gambia: Central Bank of The Gambia
    Georgia: National Bank of Georgia
    Germany: Deutsche Bundesbank
    Ghana: Bank of Ghana
    Greece: Bank of Greece
    Guatemala: Bank of Guatemala
    Guinea Bissau: Central Bank of West African States (BCEAO)
    Guyana: Bank of Guyana
    Haiti: Central Bank of Haiti
    Honduras: Central Bank of Honduras
    Hong Kong: Hong Kong Monetary Authority
    Hungary: Magyar Nemzeti Bank
    Iceland: Central Bank of Iceland
    India: Reserve Bank of India
    Indonesia: Bank Indonesia
    Iran: The Central Bank of the Islamic Republic of Iran
    Iraq: Central Bank of Iraq
    Ireland: Central Bank and Financial Services Authority of Ireland
    Israel: Bank of Israel
    Italy: Bank of Italy
    Jamaica: Bank of Jamaica
    Japan: Bank of Japan
    Jordan: Central Bank of Jordan
    Kazakhstan: National Bank of Kazakhstan
    Kenya: Central Bank of Kenya
    Korea: Bank of Korea
    Kuwait: Central Bank of Kuwait
    Kyrgyzstan: National Bank of the Kyrgyz Republic
    Latvia: Bank of Latvia
    Lebanon: Central Bank of Lebanon
    Lesotho: Central Bank of Lesotho
    Libya: Central Bank of Libya (Their most recent conquest)
    Uruguay: Central Bank of Uruguay
    Lithuania: Bank of Lithuania
    Luxembourg: Central Bank of Luxembourg
    Macao: Monetary Authority of Macao
    Macedonia: National Bank of the Republic of Macedonia
    Madagascar: Central Bank of Madagascar
    Malawi: Reserve Bank of Malawi
    Malaysia: Central Bank of Malaysia
    Mali: Central Bank of West African States (BCEAO)
    Malta: Central Bank of Malta
    Mauritius: Bank of Mauritius
    Mexico: Bank of Mexico
    Moldova: National Bank of Moldova
    Mongolia: Bank of Mongolia
    Montenegro: Central Bank of Montenegro
    Morocco: Bank of Morocco
    Mozambique: Bank of Mozambique
    Namibia: Bank of Namibia
    Nepal: Central Bank of Nepal
    Netherlands: Netherlands Bank
    Netherlands Antilles: Bank of the Netherlands Antilles
    New Zealand: Reserve Bank of New Zealand
    Nicaragua: Central Bank of Nicaragua
    Niger: Central Bank of West African States (BCEAO)
    Nigeria: Central Bank of Nigeria
    Norway: Central Bank of Norway
    Oman: Central Bank of Oman
    Pakistan: State Bank of Pakistan
    Papua New Guinea: Bank of Papua New Guinea
    Paraguay: Central Bank of Paraguay
    Peru: Central Reserve Bank of Peru
    Philip Pines: Bangko Sentral ng Pilipinas
    Poland: National Bank of Poland
    Portugal: Bank of Portugal
    Qatar: Qatar Central Bank
    Romania: National Bank of Romania
    Russia: Central Bank of Russia
    Rwanda: National Bank of Rwanda
    San Marino: Central Bank of the Republic of San Marino
    Samoa: Central Bank of Samoa
    Saudi Arabia: Saudi Arabian Monetary Agency
    Senegal: Central Bank of West African States (BCEAO)
    Serbia: National Bank of Serbia
    Seychelles: Central Bank of Seychelles
    Sierra Leone: Bank of Sierra Leone
    Singapore: Monetary Authority of Singapore
    Slovakia: National Bank of Slovakia
    Slovenia: Bank of Slovenia
    Solomon Islands: Central Bank of Solomon Islands
    South Africa: South African Reserve Bank
    Spain: Bank of Spain
    Sri Lanka: Central Bank of Sri Lanka
    Sudan: Bank of Sudan
    Surinam: Central Bank of Suriname
    Swaziland: The Central Bank of Swaziland
    Sweden: Sveriges Riksbank
    Switzerland: Swiss National Bank
    Tajikistan: National Bank of Tajikistan
    Tanzania: Bank of Tanzania
    Thailand: Bank of Thailand
    Togo: Central Bank of West African States (BCEAO)
    Tonga: National Reserve Bank of Tonga
    Trinidad and Tobago: Central Bank of Trinidad and Tobago
    Tunisia: Central Bank of Tunisia
    Turkey: Central Bank of the Republic of Turkey
    Uganda: Bank of Uganda
    Ukraine: National Bank of Ukraine
    United Arab Emirates: Central Bank of United Arab Emirates
    United Kingdom: Bank of England
    United States: Federal Reserve, Federal Reserve Bank of New York
    Vanuatu: Reserve Bank of Vanuatu
    Venezuela: Central Bank of Venezuela
    Vietnam: The State Bank of Vietnam
    Yemen: Central Bank of Yemen
    Zambia: Bank of Zambia
    Zimbabwe: Reserve Bank of Zimbabwe
    The FED and the IRS
    FACT: US Federal Reserve is a privately-owned company, sitting on its very own patch of land, immune to the US laws.


    Gold represents the skin of the gods to this cult.



    What was former Google CEO Eric Schmidt doing in North Korea?

    Setting up a private communications server for this criminal network.


    North and South freed from cabal. Strings cut. North Korea was a fake country. Kim Jong Un was never in control.


    Their symbology will be their downfall.

    • Tel says:

      There’s no point in one small group of people owning all the gold, given that most of the value of gold comes from using it as a mechanism of exchange. If a small group of people own all the gold, that would just devalue the gold in their own hands; while the rest of the world goes off and uses something else instead.

      The USD has remained strong (but not too strong), despite many predictions of disaster, because the Fed did a good job of being nuanced, injecting enough money to avoid debt deflation while also being willing to tighten up as necessary during the Yellen years, thus preventing the Zimbabwe / Venezuela outcome. I’m not naive enough to expect the Fed to magically fix the economy… the best they can achieve is a stable currency, So long as they keep doing that, I really don’t care if the Rothschild banks make some profits, or if his skinny girlfriend is into furry larping. Heck, I’ve seen much weirder things at gaming conventions.

      There are genuine problems in the US economy: too much student debt, poor education standards (and getting worse), general loss of trust and cohesion in the community, way too many regulations and central planning interference. However, none of that can be directly blamed on the Fed, better to focus on specific problems one at a time.

      • Dan says:

        What is the fed doing if not centrally planning interference?

        • Tel says:

          They are issuing currency and then fulfilling an agreement that the issued currency will devalue in a predictable manner at approximately 2% per year over the long run.

          They also operate and manage a cartel between banks, and provide a funding and clearance service for government presumably in payment for allowing their cartel. It’s a business deal like any other.

          The system is centralized in as much as there’s no competing currency, but they don’t directly interfere with business, not in the same way that governments do. If anything I would argue that government interference in Fed operation is a bigger problem than Fed interference in monetary operation. Of course, more competition in banking would impose greater discipline… cartels are usually bad… but when government goes to the Fed and demands they keep bond rates down, that’s much worse.

          Recent interest rate hikes that have happened despite Trump asking in public for low rates, and despite increasingly unmanageable government debt payments are healthy signs of the Fed proving independence.

          • Dan says:

            Ha, yeah totally different than centrally planning interference. And the FBI has shown investigating Trump despite his insistence that its a witch hunt is a healthy sign of its independence *eye-roll*.

            • Tel says:

              OK, the first scenario is like this: Trump wins and the FBI hates Trump so they spend 8 years investigating every person who ever walked into Trump Tower, and maybe they find a bit of tax evasion here and there.

              The second scenario has Hillary winning and the FBI loves Hillary so they do whatever she asks them to do, and they find whatever she asks them to find.

              Which is closer to the ideal of “liberty” ?

              • Dan says:

                Both scenarios are so far from anything to do with liberty that it is a joke. The deep state will scratch your back if you scratch theirs. You rock the boat even a little bit and they’ll try to destroy you if not kill you. To call what the deep state does or what the fed does “independence” is making a joke of that word.

      • Major_Freedom says:

        There’s no point in one small group of people owning all the gold, given that most of the value of gold comes from using it as a mechanism of exchange.

        Tel you’re so woke you never went to sleep under fiat.

        • Tel says:

          I’m told “woke” is cultural appropriation, not as bad as wearing a Mexican hat to a party, but close enough.

      • guest says:

        “The USD has remained strong (but not too strong), despite many predictions of disaster, because the Fed did a good job of being nuanced, injecting enough money to avoid debt deflation while also being willing to tighten up as necessary during the Yellen years, thus preventing the Zimbabwe / Venezuela outcome.”

        As Ron Paul says, since the Fed is targeting inflation all the time, it is constantantly defaulting.

        Real resources are being squandered. It’s not like the Fed is successfully pulling off a balancing act.

        The printing is continually causing malinvestments. That’s just logic.

        What follows from that is that the only way the Fed can keep this going for the past 100 years is that, as Peter Schiff has noted, the Fed and US government have just been doing a good job at exporting its inflation.

        A currency can lose 95% of its value and the market can keep growing? Not a chance. That’s like being taxed at 95% (all other things equal).

        No, as home to the printer (counterfeiter) of the world’s reserve currency, the US has simply shifted most of that 95% of losses onto other countries, and continues to siphon resources from them.

        America is not currently an example of how free markets can work in spite of a mixed economy. Rather, it’s an example of how socialism works when those who “know better than the rest of us” attempt to centrally plan a global economy with nation-level planners. The “planners” benefit at the expense of the non-planners.

        American citizens are currently benefitting from that siphoning of resources, but that will end.

        And when it ends, I plan to have an answer for why, all of a sudden, America collapsed kind of like Venezuela after claiming to be the Land of the Free this whole time.

        • Tel says:

          Let’s suppose I run a factory that makes tyres for vehicles and I make a clear public statement that everyone needs to buy new tyres for their vehicle at least once every two years for safety reasons. I have entered into an agreement with other factories selling similar tyres and they support my statement that two years is the absolute maximum lifetime for a set of tyres. All the tyre factories lobbied government and successfully got the law established that if the government catches anyone with tyres more than two years old they shoot holes in your tyres to prevent you doing “something unsafe” and then you have to buy new tyres. My factory pulls in revenue, and some of that goes into various costs, and one of those costs is keeping government onside to make sure they keep our little arrangement in place.

          At this point some libertarian guy pops up and shouts, “I’m gonna make my tyres last three years, maybe even four years!” but most other people say, “Shut up, two years is good enough.”

          As a businessman, I might be tempted to try to shorten that down to only one year, so I could sell more. Problem is that I’ve make a clear public statement and if I degrade my product the government will blame me for whatever goes wrong. Thus, I’m now stuck delivering what I promised, lest I get a taste of the government violence that so far I’ve been able to use for my benefit.

          Keep that in mind, and let’s talk about currency. The Fed ships a product and makes a clear public promise that their product will degrade at a rate of 2% per year. At that rate, attempting to keep Federal Reserve notes for 150 years would cause you to lose 95% of the real value, and THAT’S EXACTLY WHAT WAS PROMISED. The Fed has arranged that all banks work to the same schedule, and the government backs them up so you cannot offer an alternative product. That’s a cartel, which can happen in many situations but happens to be a banking cartel this time round.

          Now Americans could vote for a government that breaks up the banking cartel, but they don’t seem bothered by it. They voted FDR three times. They could potentially demand 1% inflation or something other value, that would require energy and campaigning but right now roughly equal number of Americans want more inflation as want less inflation. The Fed and their banking buddies no doubt get some advantage from Cantillon effects, and they need to make sure some of this gets directed to government in order to keep their little arrangement going, but they can’t get too greedy because they have made a clear public promise.

          As for foreigners, they don’t get a vote, although they do get the choice to work with any other currency if they don’t like FRN’s but hey time and again they vote with their feet and demonstrate a preference for FRN’s. Trump put this to the test playing economic pushy shovey with the Chinese, and what the CCP discovered is most people around the world don’t want to rock the boat on the USD. Sure, if Washington insists on alienating a large enough number of countries with outright sanctions, eventually they might find a way to break the power of the dollar, but that’s not what the Fed wants, nor is it anything the Fed can control. Extremist countries like Iran that fundamentally disagree with everything the USA stands for, want to be able to make transactions in USD and they howl and thump the table when prevented from doing that.

          If the product the Fed delivered was garbage, then why are Iran upset to be told they can’t have any?

          I’m up on Austrian theory, but the canonical starting point is to say that when you see someone making a choice, we conclude they made that choice because it was their best option available, based on their own preferences. Well, start with that observation that many people (both Americans and foreigners) are making the choice to conduct their business in USD.

          Think about it even more, with the Fed promising 2% inflation on the nominal value of the currency, anyone buying a long term Treasury bond at lower than 2% has VOLUNTARILY chosen a virtually guaranteed loss in real terms. Yet they choose this (I don’t buy these, but others do). No one forced the Chinese to buy these things. No one forced Japan (well, there are US military bases in Japan, maybe that changed their mind, but as you say all things being equal those bases aren’t going anywhere).

          Do you see what I’m getting at? People enjoy stability, it’s valuable.

          • guest says:

            “People enjoy stability, it’s valuable.”

            People also enjoy the *perception* of stability, as when they can consume more in the present by shifting materials from production to consumption.

            That’s not stable because their productive capacity isn’t sufficient to sustain their elevated level of consumption.

            It’s the same with the FRN. For example, deals were made with the Saudis to turn America’s military into traitors so that America could ensure they had more people to export our inflation to, the deal being that they only accept FRNs.

            (The Constitution doesn’t permit the use of the military for protecting “economic interests”. They’re only to be used, defensively, for invasions, and for suppression of violent factions attempting to overthrow state governments or if one state attempts to use violence against another state.

            (Every use of the military outside of those is anti-American. Armies (not navies, though) aren’t even supposed to exist for more than two years at a time without an enemy targeted by a declaration of war, with national and state-level defensive capabilities reverting back to state-level militias.)

            “I’m up on Austrian theory, but the canonical starting point is to say that when you see someone making a choice, we conclude they made that choice because it was their best option available, based on their own preferences.”

            People make a choice because they *believe* it was their best option available. That’s an important distinction. All malinvestments are made for the same reason all good investments are made, that being that, in both cases, those choosing believed that was their best option.

            And people will continue to make both kinds of investments so long as they continue to believe it’s in their best interest to do so. That is quite independent of whether or not it actually is in their best interest, as they themselves imagine that to be.

            Many conservatives – Alex Jones, included – believe that it would be a mark of failure for the FRN to lose its reserve status around the world. They don’t understand that most of the problems that would result from it would be caused by government interventions prolonging the downturn (causing a depression), and that those that are the result of reallocating resources back to production (of what consumers will want in the future) and away from consumption (of what consumers would choose to defer had they known how little wealth they really had) are a necessary part of making America great again.

            (America was made great through free markets, not a Keynesian increase in consumption at the expense of production and then having those losses shifted to other countries through inflation.)

            When the FRN loses its reserve status, it will not be because everybody using it was actually benefitting the whole time and then all of a sudden some shock made the Animal Spirits skittish. It will be because it has been causing losses the whole time, and the Fed will have reached the limit of those incurring the losses to be fooled by statistics (or guns) into believing that they’re better off continuing to use it.

            “If the product the Fed delivered was garbage, then why are Iran upset to be told they can’t have any?”

            Because they are also being forcefully prevented from using gold.

            (I’m no fan of Iran, and I do believe they are quite capable, and willing, to trade their way to acquiring nuclear weapons in their continued attempts at wiping out Israel; And I’m not impressed by the argument that they don’t have the capacity to fight because they lack the productive capacity – the point is that they are willing, and that trade with other Arab nations will make that possible, if they’re given the opportunity.

            (I would still support their freedom to use gold because it would allow gold to compete with all fiat currencies, and the increased freedom from government manipulations of the currency would increase the ease of acquiring the weapons needed for defense, as well incentivize better [if not great] relations between market participants.)

            Your question also presents an opportunity to get at the heart of the Keynesian argument for government-issued fiat currency.

            We see people trade for it, so people conclude that it has value. Keynesians see that, without the force of guns, nobody would voluntarily use paper as money because it doesn’t *necessarily* represent anything of value.

            So they infer from this that force is what gives the FRN its value. It’s also the reason why they believe that bitcoins have zero value.

            (And no, trading bitcoins for FRNs – which *are* backed by force – does not prove that bitcoins have value. They’re just riding the FRN bubble.)

            But what is our government enforced fiat money system but a protection racket? We use their fiat money so they can continually steal from us through inflation, or else they take more from us by force than we would otherwise lose to inflation.

            But what, really, are the catallactics of this arrangement? That’s the real issue.

            The real issue is not that we voluntarily trade for FRNs – because we could be fooling ourselves, and belief is all that is necessary in order for us to make trades.

            The real issue is whether or not our trades *actually* provide the benefit we intend them to (that’s in keeping with the logic that all value comes from the individual’s own ends).

            If a trade only works in our own favor because someone else must, necessarily, take a loss, then that’s not sustainable, and to the extent that you continue making those trades in the belief that it’s sustainable is the extent to which malinvestments are being made somewhere in the economy (with the purchase of consumer goods being a form of “cashing out” and losses being shifted onto some other sucker).

            So, applying this to our protection racket, what we’re really asking is what is the value of being protected.

            Consider the value of purchasing protection services if it were’nt possible for you to incur losses. There’d be no point. Which means that protection services cannot logically be a *source* of value. The value of protection derives from the value of the property being protected, *not* from the protection service, itself.

            And since we wouldn’t need this government protection if the government, itself, wasn’t threatening us, that means that (apart from redistribution of wealth) we would all be richer if we didn’t have to use the fiat money in the first place.

            So FRNs require losses in order to be traded. We are less wealthy for using FRNs than if we weren’t being threatened.

            Can you see, then, that no amount of the “voluntary” use of FRNs can possibly mean that they have value?

            • guest says:

              More on how the voluntary nature of trading does not, by itself, always equal value as imagined by individual traders; and also how such trades can continue for quite awhile without the losses being noticed:

              “What Were You Thinking?”

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