naked capitalism

jgw says:

The graph showing consumer price levels would be more convincing if it was readable. Any chance of publishing a key?

But What do I Know? says:

**Despite all of the talk and expenditure in Washington, the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the deflation monster.**

They do in fact have another bullet–more of a bomb, really. To use it requires only the Will. This final option is to send every taxpayer in the country (or every adult, or every person) a check (or stored-value debit card) for $10,000 (or $5K, or $20K).

I am not advocating for this, or suggesting it is a good idea. It would be a desperate measure, but it may be in a few years that the party in power is desperate–and there’s nothing Congress likes better than handing out money. And it would end deflation. It is important to keep this in mind when someone opines that deflation is inevitable, or that the government is “out of bullets.”

This version of the Deplorable Word (cf. C. S. Lewis) could also come in the form of a temporary moratorium on federal taxes–a step that would favor the wealthy. But in any case, it would allow the US to competitively devalue its currency in a way that it cannot now (with our trading partners outside of the Eurozone effectively pegging to the dollar). The mere threat of it could force China and the Gulf States to allow their currencies to strengthen.

Of course, any measure of this kind would be ultimately insane–how would we get any of our needs provided for if money loses its motivating force–but that doesn’t mean it wouldn’t be adopted (especially on a creeping basis, or as a “one-time” get-the-economy-going-again measure, and if presented as a “war-time” attack on “economic distress.”) After all, the federal government will only take in roughly half of what it will spend this year, and it doesn’t look all that different next year absent tax increases. What’s another couple of trillion dollars of debt?

joebhed says:

In mentioning Irving Fisher’s Debt-deflation theories, it may be of value to probe further down that path, as has been done before.
His “syndrome”, if you will, for the debt-deflation spiral to the bottom has a number of markers that are as relevant today as they were when penned, even with the social-economic and financial reforms of the mid-30’s.

However, most notable for me was Fisher’s advice on how to AVOID this inflate-deflate cyclicality – his earlier and subsequent calls for 100 Percent Money, nominally referred to these days as full-reserve banking.

Along with Henry Simons, Milton Friedman and many others, Fisher saw that it was the debt-money system of fractional-reserve banking that was the CAUSE of the problem, and all advocated abolishing the federal reserve and debt-money, just as many Austrians and Libertarians do today.

Given the breadth and depth of the abyss awaiting the fall of the debt-money system, it is worth a question as to whose job it is to develop the needed exit strategy from fractional reserve “parasitism”.

This will be widely discussed a the upcoming American Monetary Institute monetary reform conference in Chicago.
See:
http://www.monetary.org/2009schedule.html

The Money System Common.

walt says:

For larger charts follow link beginning “Thought Offerings…”

RedSt8r says:

@Siggy: I propose we consider the stone money of ancient Yap. How would Goldman Sach’s pay bonuses if money were stones? Gravel pits?

Bruce Wilder says:

YoY gives a misimpression as to the timing of inflation/deflation. It would be better, I would think, to use the 3-month moving average as a tracking number, to discover when deflation takes hold. Too often the y-o-y number is going to track past inflation spikes or dips instead of current developments.

ScottB says:

John Kissinger, using Case Shiller instead of owner-equivalent rents greatly overstates inflation, since most homeowners fact little or no increase in housing costs on a monthly basis–many have already paid off their mortgage, many of the rest have fixed monthly payments. Only new homebuyers and those whose ARM is up would have a substantial increase in their cost of living.

Sivaram Velauthapillai says:

Joebhed: “…his earlier and subsequent calls for 100 Percent Money, nominally referred to these days as full-reserve banking.”

Name a country or scenario that has had 100% reserve banking. If you can miraculously find one—there isn’t one after 1800 I believe—name a situation where that country prospered.

I’m not an economist but it’s quite probable that, in a free market, country/banks/etc that offer fractional banking will attract more customers than the full-reserve banks. A country that has full reserve banking has no monetary policy (this is favoured by some extreme libertarians who distrust all government, including the military) while a country that has one does have a monetary policy. Although governments can make mistakes, I know which side I will bet on—the one with monetary policy.

There is a reason USA, which never used full reserve banking AFAIK, started dismantling the gold standard (which is closer to full reserves than pure fractional fiat banking) during the 1930’s. It was virtually impossible for USA to compete against the world!

There are reasons why full-reserve banking essentially died after 1800 (or even earlier); and why the gold standard died in the 1930’s (or in the 70’s in USA, depending on how you define it). It’s easy to blame governments for it but I actually think it was free market forces that killed those systems. If you think of currencies as being a market itself, there were various choices in the 1930’s (some backed by gold, some with no backing, some issued by dubious countries, some stronger countries, and so on.) The market itself was the one that decided that USA had to go off the gold standard. Yes, the government passed the laws but they were reacting to the market forces.