I'm wondering how the pro FRB crowd, who also hold ABCT, can answer the expectations criticism?
The idea that FRB causes the ABCT makes sense since every actor acts rationally and reduces his reserve ratio lower and lower due the institutional framework; and consequently the interest rate falls below what it ought. If one sweeps away FRB you are left with a mere increase in the supply of money causing the ABCT and hence reducing the interest rate. My question is why isn't this just expected and the interest rate rise? It seems it would make no difference if the money supply increased than the supply of pizzas increases. Why wouldn't actors anticipate the increase in the money supply in the same way they do with pizzas?
If this objection cannot be countered then either the ABCT should be resigned to history or FRB should; my money's on the latter.
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Yours sincerely,
Physiocrat
I don't understand exactly what you're asking. FRB does not cause the ABCT. What causes the ABCT is an increment in the money supply, not backed by an increment in the demand of money, made by artificially lowering the interest rates (by incrementing bank reserves or lowering its reserve requirements, for example). I assume you're calling "every actor" to "every banker", right? Every banker is ultimately backed by the government, so they don't need to worry about anything. Besides that, you can't know if an increment of the money supply is backed by an increment of the demand of money. When banks receive a lot of reserves for further credit lending, and they don't believe that the economy will recover, a credit crunch occurs. ABCT is a theory regarding human behaviour, even Mises said that it can happen that bankers don't want to lend and ABCT won't occur. That doesn't harm the validity of the theory.
ivanfoofoo: What causes the ABCT is an increment in the money supply, not backed by an increment in the demand of money, made by artificially lowering the interest rates (by incrementing bank reserves or lowering its reserve requirements, for example).
What causes the ABCT is an increment in the money supply, not backed by an increment in the demand of money, made by artificially lowering the interest rates (by incrementing bank reserves or lowering its reserve requirements, for example).
The latter is essentially FRB- lending more money than you have legal title to. I fail to see what an increment in the demand for money has to do anything since all an increase in the supply of money without a rise in demand for money leads to the PPP of money to fall; this will increase the price premium of the interest rates but not ABCT since it doesn't artificially change the interest rate.
ivanfoofoo: I assume you're calling "every actor" to "every banker", right?
I assume you're calling "every actor" to "every banker", right?
Yes.
ivanfoofoo: Every banker is ultimately backed by the government, so they don't need to worry about anything.
Every banker is ultimately backed by the government, so they don't need to worry about anything.
That's an added incentive to run reserves lower.
ivanfoofoo: Besides that, you can't know if an increment of the money supply is backed by an increment of the demand of money.
Besides that, you can't know if an increment of the money supply is backed by an increment of the demand of money.
But can't know if this is the same for pizzas so why don't pizzas contribute to the ABCT?
ivanfoofoo: When banks receive a lot of reserves for further credit lending, and they don't believe that the economy will recover, a credit crunch occurs.
When banks receive a lot of reserves for further credit lending, and they don't believe that the economy will recover, a credit crunch occurs.
I fail to see what the reserves have to do anything here- a crunch occurs merely when no banks will lend.
ivanfoofoo: ABCT is a theory regarding human behaviour, even Mises said that it can happen that bankers don't want to lend and ABCT won't occur. That doesn't harm the validity of the theory.
ABCT is a theory regarding human behaviour, even Mises said that it can happen that bankers don't want to lend and ABCT won't occur. That doesn't harm the validity of the theory.
My point is FRB being legal makes it rational to reduce the reserve requirements and artifically incresing the money supply; further this money acts like it looks like real savings unlike a general increase in the money supply with which people would just change there expectations.
That's right, all an increase in the supply of money without a rise in demand for money leads to the PPP of money to fall, compared to the PPP of money without that increase in the supply of it.Pizzas don't contribute to the ABCT because it is a consumption good. An increment in pizzas will only produce that, overproduction of pizzas. Only an increment in money has the harmful effects of the ABCT, because it encourages investment, not backed by real savings.
If the increment in money supply is backed by an increment in the demand for money, there is an inflationary process, but that won't contribute to the ACBT. As supply equals demand, their expectations won't really change (maybe we should consider psycological issues here) because people don't save in terms of "quantity of dollars" but instead of "purchasing power".Maybe reading about free banking should help, as White and Selgin acknowledge that free banking with FRB won't make ABCT, because money supply expansion is a self-limiting process when banks are in real competition.
I think it's because no one can truly know the extent of fluctuations in the purchasing power of money, they may have a general sense of the direction, but the true extent can never be known; people aren't omniscient. Indeed, during inflation banks do increase the rate of interest, but never to the natural level, but as a rule, below it. If the interest rate was at the natural rate, the demand for fiduciary media would be non-existent.
Physiocrat:It seems it would make no difference if the money supply increased than the supply of pizzas increases
Not sure I'm following you. An increase in the supply of pizzas is completely different than an increase in the supply of dollars. Commodities used for consumption act differently than commodities used as a media of exchange. Increasing the supply of pizzas increases wealth; increasing the supply of dollars does not. Even if the additional supply matches the increased demand (very rare), and the market/money rate of interest remain the same, their is an increase in the natural rate of interest. As the creation of inflation, that is, fiduciary media, does not represent actual savings, or differed consumption. This disproportionality is what causes the ABCT.
For example, I usually order 3 pizzas a day, but my demand for pizza increases, for whatever reason, to 5 pizzas a day. The Pizzahut owner sees that the demand for his product increased, but doesn't have any extra cheese, dough, whatever. So he decides to send me 3 real pizzas and 2 made out of paper. I eat the first 3 (boom), but the next 2 are made out of paper (bust).
Esuric: Not sure I'm following you. An increase in the supply of pizzas is completely different than an increase in the supply of dollars. Commodities used for consumption act differently than commodities used as a media of exchange. Increasing the supply of pizzas increases wealth; increasing the supply of dollars does not.
Not sure I'm following you. An increase in the supply of pizzas is completely different than an increase in the supply of dollars. Commodities used for consumption act differently than commodities used as a media of exchange. Increasing the supply of pizzas increases wealth; increasing the supply of dollars does not.
That depends on what you consider wealth, it is a subjective concept. The real issue is that increasing the supply of money through decreasing the interest rate starts the ABCT. If you increase the money supply, and give that money for charity, that won't cause any ABCT, as the new money is being used for consumption, and not for investment. But of course that it will have an inflationary effect.
ivanfoofoo:That depends on what you consider wealth, it is a subjective concept. The real issue is that increasing the supply of money through decreasing the interest rate starts the ABCT. If you increase the money supply, and give that money for charity, that won't cause any ABCT, as the new money is being used for consumption, and not for investment. But of course that it will have an inflationary effect.
No, wealth is defined by how much stuff you have, that's not really debated. Increasing the money supply never increases wealth, ever. And yes, if you increase the money supply and people use that money for purely charitable purposes, there would indeed be a cyclical correction. Labor and capital will be drawn into the charity bubble, as charitable firms expand and bid away fops. When the inflation stops, and the charities see their revenues decline, they will contract, causing unemployment. Plus, creating inflation presupposes lowering the rate of interest, inevitably causing bubbles in other sectors, but it's not really important for this imagined scenario.
Esuric: No, wealth is defined by how much stuff you have, that's not really debated. Increasing the money supply never increases wealth, ever. And yes, if you increase the money supply and people use that money for purely charitable purposes, there would indeed be a cyclical correction. Labor and capital will be drawn into the charity bubble, as charitable firms expand and bid away fops. When the inflation stops, and the charities see their revenues decline, they will contract, causing unemployment. Plus, creating inflation presupposes lowering the rate of interest, inevitably causing bubbles in other sectors, but it's not really important for this imagined scenario.
Ok, what if I consider that holding 10000 dollars (no matter its purchasing power) is wealth for me? When they said that money (in fact, fiat money) is not wealth, they presuppose that no one considers it wealth, as fiat money is just a medium of exchange without any other real value, as almost everyone considers (unlike gold, that has other uses). And about the charity purposes, you're presupposing a "charity industry" which I never mentioned. I just wanted to say that money could be given to poor people directly, with no "charity bubble" ocurring. But you're right that the economy would shift to producing stuff for that poor people, and after they consume all their money, the economy will have to re-adjust to the new market conditions. But that's not a "cyclical correction", nor ACBT, it's just market dynamics (artificially pumped, right).
ivanfoofoo:Ok, what if I consider that holding 10000 dollars (no matter its purchasing power) is wealth for me? When they said that money (in fact, fiat money) is not wealth, they presuppose that no one considers it wealth, as fiat money is just a medium of exchange without any other real value, as almost everyone considers (unlike gold, that has other uses).
Indeed, fiat money has no use value whatsoever. Increasing the money supply by "x" does not mean an increase in the nation's wealth by "x." It just means a corresponding increase in aggregate price indices. If you increase production by "x," the nation's wealth increases by "x." Don't confuse utility theory, people do value money differently, like all commodities; but an increase in the money supply does not make anyone wealthier if it occurs at once. People who receive it first will be made wealthier, and the people who see it last will be made poorer, but in the end, no additional wealth is gained. If you want 10000 dollars just to hold, then you value money for something other than a media of exchange. The rational demand for money stems from the demand of the stuff you can buy with money. Again, if you half the money supply, the nation isn't 50% poorer, and doubling it doesn't make us 2x richer.
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