[mike777]

DrTodd13, on Dec 19 2008, 01:10 AM, said:

You have to pay the piper sooner or later.  Unnaturally low mortgage rates is part of what got us into this mess.  Interest rates below their natural level necessarily create malinvestment.  All malinvestment has to work its way out of the system at some point and it is never pleasant.  The solution to this problem is not to create an even bigger bubble that also has to pop.  Anything other than dismantling the FED and limiting the government's ability to modify the supply of money is rearranging deck chairs on the Titanic.

Excellent point, my point is that 4-4.5% is not unnatural given zero percent treasuries. In fact a 4.5 mortgage is not too low. On Dec 12th 10 year US Treasury yield was 2.43% Hence 4.5% is a spread of about of 2.07% if my math is correct. In a normally functioning mortgage market the spread is 1.6%. Not sure what the ten year yield is today. Note as a consumer I am only thinking about a 5.1%....this seems a bit high...

btw in fact the fed is limited by free markets how much it can modify the supply of money. If you do not want to loan money to the government, do not. Countries do default in terms of local money..See Russia in 1990's.

Bottom line credit is the lifeblood of the modern world. Credit per se is not evil.

I do agree high levels of inflation are evil.

edit...12/18/.......10 year yield=1.85
http://www.ustreas.gov/offices/domestic-fi...eal_yield.shtml

[DrTodd13]

Well, I think that 4 or even 5% is an unnaturally low interest rate. I don't care what the FED rate is because that is even more insanely low or the spread. Historically, from what I am aware of, a non-manipulated interest rate is typically quite a bit higher than 5%.

In my opinion, any inflation is evil...not just high inflation.

[mike777]

DrTodd13, on Dec 19 2008, 02:05 AM, said:

Well, I think that 4 or even 5% is an unnaturally low interest rate.  I don't care what the FED rate is because that is even more insanely low or the spread.  Historically, from what I am aware of, a non-manipulated interest rate is typically quite a bit higher than 5%. 

In my opinion, any inflation is evil...not just high inflation.

Fair enough, we have different opinions.

1) Given ten year yield I think rates are too high, not too low(note none of this is Fed rate)
2) I think zero inflation(longish term) is evil and high inflation is evil.
3) Yes, I mean we must, must expand the money supply somewhere in the range of 2-3% longish term.

[Gerben42]

Quote

Bottom line credit is the lifeblood of the modern world. Credit per se is not evil.

So if I'm a good citizen, I put myself in debt to someone. Well... no thanks!

[mike777]

Gerben42, on Dec 19 2008, 03:05 AM, said:

Quote

Bottom line credit is the lifeblood of the modern world. Credit per se is not evil.

So if I'm a good citizen, I put myself in debt to someone. Well... no thanks!

Gerben bottom line:
1) buy a new car! I assume you are youngish....buy a bmw, mercedes convertible(sp)..Porsche are cool, I have owned many over the decades.......but an old Jaguar XKE is acceptable.
2) buy a big house!
3) buy a bunch of your fav gadgets to fill above!(pinball machines are cool, granted advanced tech.)


Do not, repeat, do not, live is some dump of an apartment near campus and ride your bike.


....side note....best wishes in your basic research to improve the lives of your unborn grandchildren ty...

[Gerben42]

Quote

Hence 4.5% is a spread of about of 2.07%

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

Anyway, I've been raised on following game plan:

1. Acquire skills
2. Make money using skills from step 1.
3. Retire, spending money from step 2.

And not acquiring debt or anything. Okay, this strategy won't make me wealthy like Warren Buffett or so, but I don't want to. I'm sure I have a better life than most CEOs, they work too much.

[mike777]

Gerben42, on Dec 19 2008, 03:24 AM, said:

Quote

Hence 4.5% is a spread of about of 2.07%

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

Anyway, I've been raised on following game plan:

1. Acquire skills
2. Make money using skills from step 1.
3. Retire, spending money from step 2.

And not acquiring debt or anything. Okay, this strategy won't make me wealthy like Warren Buffett or so, but I don't want to. I'm sure I have a better life than most CEOs, they work too much.

Yes....I am advocating that you, Gerben, acquire debt.

Let me put this another way.

Yes, I advocate you leverage your wonderful, special, skills.
If not for your family...then for the betterment of mine.

[cherdano]

Gerben42, on Dec 19 2008, 02:24 AM, said:

Quote

Hence 4.5% is a spread of about of 2.07%

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

Yup - assuming you actually get the money back, of course. It is the difference between the interest rate for the loan and the interest rate for US treasury bills, which are deemed safe. So the spread is a measure for the risk of mike777 not paying back the credit (aside from Gerben's administrative costs, of course).

[DrTodd13]

mike777, on Dec 19 2008, 12:00 AM, said:

3) Yes, I mean we must, must expand the money supply somewhere in the range of 2-3% longish term.

Why? What's the proof?

[mike777]

DrTodd13, on Dec 19 2008, 04:12 AM, said:

mike777, on Dec 19 2008, 12:00 AM, said:

3) Yes, I mean we must, must expand the money supply somewhere in the range of 2-3% longish term.

Why? What's the proof?

I have no internet links..but pls read.....economic papers.....ty. I am not a professor with citations.

If you read the literature and disagree..fair enough.

btw important side note....I find "proof" of most...by far most does not exist.

I am told it is very, very expensive to prove anything....

My goal is too "advance" the discussion....if you want proof...I rest....

Ok.. I stand by..repeat....expand money suppy in range of 2-3% normal times...Increase money suppy of zero...longish term=evil.

In simplish terms increase money supply per long term growth of
GDP.

In times of deflation.......expand money supply alot......huge...

[Al_U_Card]

mike777, on Dec 19 2008, 04:38 AM, said:

In simplish terms increase money supply per long term growth of
GDP.

I agree.

Expand the money (medium of exchange that represents value) at the same rate as the "creation" of value.

[DrTodd13]

I have read a lot of materials on this subject and I am convinced that there is no "optimal" amount of money, even relative to the current amount. I'm of the Austrian school and many disagree with their conclusions but it isn't just about "good for the economy" for me, it is also about ethics and a system built around consistently stealing 2 to 3% of people's money per year is not ethical and never acceptable even if it produced utopia.

Al...when you say to create money at the same rate as the creation of value, do you mean increase it by an amount equal to GDP? The total amount of US dollars is around 11 trillion. US GDP is around 14 trillion. That sounds like 127% inflation to me. Even if you assume that "creation of value" is just the average profit from that 14 trillion then profit would be around 1.26 trillion (historical 9% rate of profit) which is still like 11.4% inflation.

[mike777]

If I understand your point you seem to feel 2-3% growth in the money supply that may result in some low level of inflation is stealing money and is evil.

I will try and repeat my main point, zero percent growth in the money supply is evil, it is very very destructive for your family and for mine.

example if the amount/supply of money in 2018 is the same as of 2008, that is horrible for your family and for mine.

As for today, if the choice is a balanced budget for 2008/009 and zero percent growth in the money supply, I think that is a disaster for your family and mine.

[Al_U_Card]

DrTodd13, on Dec 19 2008, 12:38 PM, said:

I have read a lot of materials on this subject and I am convinced that there is no "optimal" amount of money, even relative to the current amount. I'm of the Austrian school and many disagree with their conclusions but it isn't just about "good for the economy" for me, it is also about ethics and a system built around consistently stealing 2 to 3% of people's money per year is not ethical and never acceptable even if it produced utopia.

Al...when you say to create money at the same rate as the creation of value, do you mean increase it by an amount equal to GDP? The total amount of US dollars is around 11 trillion. US GDP is around 14 trillion. That sounds like 127% inflation to me. Even if you assume that "creation of value" is just the average profit from that 14 trillion then profit would be around 1.26 trillion (historical 9% rate of profit) which is still like 11.4% inflation.

Hi Todd

My intent concerned the growth of the amount of money. As GDP grows, so should the money supply that represents its "value". Supply and demand for goods and services plays a role in the value for money and the value of money. The underlying ethical principle would apply to both.

[DrTodd13]

mike777, on Dec 19 2008, 11:32 AM, said:

If I understand your point you seem to feel 2-3% growth in the money supply that may result in some low level of inflation is stealing money and is evil.

I will try and repeat my main point, zero percent growth in the money supply is evil, it is very very destructive for your family and for mine.

example if the amount/supply of money in 2018 is the same as of 2008, that is horrible for your family and for mine.

As for today, if the choice is a balanced budget for 2008/009 and zero percent growth in the money supply, I think that is a disaster for your family and mine.

How can you say these things after admitting you haven't studied the topic? You've bought into the propaganda of the banking elites who like the current system because it enriches them at your expense. There is absolutely no proof, in my informed but amateur opinion, that inflation is necessary for a healthy economy. Say it as many times as you want but no one should be swayed by your economic fearmongering without at least some evidence.

The following is the classic treatise on the topic:

Von Mises: Theory of Money and Credit

[Winstonm]

If you strip it to its essence, money is an exchangeable unit that represents labor, either physical labor or intellectual labor.

In other cultures at different times many things have been used as money, including sea shells.

We now use debt-based fiat currency as it is elastic. The difficulty of expanding the supply is a big problem with gold-backed currencies. The supply of money in an economy needs to expand to accomodate growth of population and its increased labor.

If you have an expanding population and a stagnant money stock you have continually higher demand for a limited resource - tight borrowing and higher interest rates.

[DrTodd13]

Winstonm, on Dec 19 2008, 12:36 PM, said:

We now use debt-based fiat currency as it is elastic. The difficulty of expanding the supply is a big problem with gold-backed currencies. The supply of money in an economy needs to expand to accomodate growth of population and its increased labor.

If you have an expanding population and a stagnant money stock you have continually higher demand for a limited resource - tight borrowing and higher interest rates.

You can say it needs to expand until you are blue in the face but that doesn't make it so. The only difficult thing about gold not allowing the money supply to expand is for governments and bankers who then have a much more difficult time stealing from you. We had a thriving economy while we were on the gold standard and from what I've read there is no reason it couldn't be so again.

While it is generally true that a fixed supply and more people results in higher demand for money, so what? The cost of money goes up like anything else would. Higher interest rates are not a bad thing!!! Another lower than the natural interest rate spurs mal-investment which when it comes to an end equals misery for everyone. How can you be in favor of natural supply and demand for everything else but not for money?

[Winstonm]

Quote

Another lower than the natural interest rate spurs mal-investment which when it comes to an end equals misery for everyone. How can you be in favor of natural supply and demand for everything else but not for money?

Hi Dr. Todd,

To answer your question, it is because the natural state of money supply is elastic in that money simply is a representative of labor - it is easier to carry around sea shells, gold coins, or paper notes than to constantly barter (In that in barter you must also find someone with need for what you offer in exchange.)

When populations rise, labor (money) increases - it takes more goods and services to accomodate the increased population, but the money does not represent the increased goods and services, it represents the increased labor that is traded for goods and services.

The Austrian School is persuasive and I believe closer to correct than other economic ideas. Even so, Von Mises recognized that a gold-backed currency was not an ideal currency though most likely necessary to curb government debts.

As to what you say above - I agree. The malinvestment and misallocation of resources is a direct result of mismanaging the debt supply (but not money stock) coupled with lax regulation brought about by the Minsky-like illusion of stability that preceded the collapse.

[DrTodd13]

Money is common unit of exchange. Labor isn't money. People trade labor for money.

If you keep increasing productive effort but keep the money supply constant then either the velocity of money will increase or prices will fall. These falling prices are not deflation. Keep velocity constant and money supply constant and prices will fall. That includes the price for labor. So, your wages fall by 10% but you are no worse off because the prices of everything else has also fallen 10%. If you have any savings then you are even better off because effectively the value of your savings keeps increasing as overall prices fall due to increased productivity. This is one of the huge differences between the Austrian school and the Keynesian school. Keynesians would say that wages resist falling and that you perpetually stay at a state of decreased output until wages rise to previous levels. Austrians would say that wages will fall and that full output is again quickly reached. For those born in the fiat money era, they are so accustomed to everything becoming more expensive then yes, wages will be somewhat sticky but, imo, only temporarily so. It would take some re-education about how an economy functions based on commodity money but it is possible and would be beneficial for the average person.

[Winstonm]

Compare what I wrote to what you wrote:

Quote

Money is common unit of exchange. money is an exchangeable unit

No difference - Except I went on to say that it REPRESENTS labor.

Quote

Labor isn't money. money simply is a representative of labor

Again, we are in agreement. Labor isn't money - but money Represents the value of labor.

Quote

People trade labor for money.  it represents the increased labor that is traded for goods and services.

In essence, we agree. People trade labor for other's labor and utilize money to facilitate the transaction.

The bottom line is that money is conceptual - and various goods have been used to represent the concept of money, including gold, silver, paper, and sea shells.

If Baker Bob trades $10 for a dozen ears of corn from Farmer Frank, and Farmer Frank then buys $10 worth of sugar from Caneman Calhoun - all that has occured is that Baker Bob has exchanged the value of his labor (making bread) and Farmer Frank accepted the exchange on the basis that he could use the exchange unit to trade his labor (planting and harvesting corn) for sugar.

Without the labor, the unit of exchage has no value. Gold and silver of themselves have no value - the value is added because of demand - and that makes them commodities rather than money.

When gold and silver are used as money, they still represent the value of the labor required to accumulate them. In a Utopia or the Garden of Eden, money would have no value as all needs would be met without labor.

But in our world, if you want someone to build you a house, you have to pay for it with your own labor - money simply makes the transaction easier.