Keynesian Solution to depression: Prepare for a non-existent attack by Space Aliens!... <iframe width="560" height="315" src="http://www.youtube.com/embed/3jzvMGuRXvs" frameborder="0" allowfullscreen></iframe>
Fixing the dollar value is a mess not worth the cost. With most nominal contracts written in with cost of living adjustments, it really isn't a huge deal if inflation is below 3-4%. Right now, inflation is averaging about 2.5%, a healthy amount. It's being dampened by deleveraging anyways. The dumbest thing I think anyone has ever proposed is abandoning monetary discretion for a hyperinflation that has not, and will not happen (because of aforementioned deleveraging).
"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront."-Mankiw (CEA for Bush Admin., Romney advisor, Harvard professor, #28 most cited economist in the world). http://en.wikipedia.org/wiki/A_Monetary_History_of_the_United_States This isn't even a strictly Keynesian view. Even the old-school monetarists know what's up.
a) Austrian economists reject liquidity preference altogether, because they believe interest rates are based solely on time preference and low investments in "liquidity trap" periods are actually caused by malinvestment. At a certain point, they suffer from the same delusion real business cycle people do; which is that large decisions, even at the margin, are based on solely time preferences, which leads to wacky things like these theorists saying labour supply depends largely on the inter-temporal effects of interest rate changes, which is like saying you'll quit your job or work less hours because the real interest rate (which most people can't gauge anyways) "shifts". b) A liquidity trap already exists in America, but you can see why central banks would try to avoid that situation if they are believers in monetary intervention. In this case, Krugman argues for the liquidity trap in complete contravention of your perspective, in arguing that purposeful reflations (which spurs on more spending, and cushions the debt blow of deleveraging) should be done, and that monetary policy should therefore be ultra-aggressive and encapsulate unconventional monetary policy (such as QE) to push that money out into the system.
Hold on, hold on....are you agreeing with Krugman here? That what we need is to prepare for a non-existent invasion by Space Aliens to come out of the depression?...
Inflation and artificially low interest rates destroy the savings of people who want to retire comfortably. Why do you want me to suffer when I am older?
This is about as spacious a reason as I have ever heard. You realize you support a candidate that at one time or another has had crazier ideas, the one to abolish the Fed being one of them? Regardless, if you feel uncomfortable agreeing with Krugman, I can pull out other Nobel laureates with the same opinion, chiefly Stiglitz.
Low inflation is much more preferable to low deflation. Do you want to retire in a world where asset prices are plummeting, no one is spending, aggregate demand is plummeting, and there is a "lost decade" akin to Japan. Or would you rather prefer retiring in the Great Depression?
The solution is to have market interest rates. When there is too much savings in an economy, banks will respond by lowering interest rates (since there are many people willing to lend). When there is too much consumption in an economy, banks will respond by raising interest rates for the opposite reason...
I believe you're referring to a LIBOR-like solution, which some have proposed. Notwithstanding the fact that most central banks keep LIBOR in mind as a guideline through the Taylor rule, this purely private-sector endogenous money concept of money supply without any government intervention or regulation is dangerous. It would have, in the case of a macroeconomic shock like 2008, sunk the economy, as private banks would have been imperfect lenders of last resort that would have lacked the legitimacy for collective Pareto-optimum and coordinated responses, so you would have still had moral hazard and in the absence of any regulators, an even more dangerous extension of the shadow banking system that would have critically failed at several junctures without several backstops.
So your solution is to turn to the politician who's never actually passed anything in his decades in government? What makes you think something went wrong? In general, we want small, controlled amounts of inflation, which is what we've had for basically the past 20 years. Are we? Despite a massive injection of liquidity and new debt, prices have not really budged in the last 4 years. Inflation has been at multi-decade lows, prices of everything from milk to gas to housing have remained flat. Prices for many things such as technology have actually dropped. For the first time in decades, there was no need for a Cost-of-Living increase in Social Security. Outside of your ability to buy gold and silver - which is really irrelevant in the real world - our currency hasn't lost any value. No - they've been threatening it for political reasons. No country has actually seriously considered this change. Historically, wages have risen with inflation, so that's clearly not true. People's incomes are stagnant because of international competition, not inflation. As noted above, food and gas hasn't gotten more expensive. Our dollar is only worth less if you're trying to buy gold for some reason. But most people use their dollars to buy other goods and services, and the dollar buys as much of that stuff as it did several years ago.
Yes, I believe in abolishing the Fed. The market will do a better job of setting interest rates... Which is why I believe that Keynesian economists should perhaps re-evaluate their belief system. I shouldn't have to explain to you using why vast resources to prepare for a non-existent invasion of Space Aliens is a terrible idea...
As an aside, it amuses me that Paulites, who I assume are the "strong independent America" type keep on pushing solutions that would make America dependent on others. The gold standard is a major bogey for a country that is quasi-hostile to two of the largest sources (Russia and China), and setting "market interest rates" in finance parlance is a direct reference to the London Interbank Offered Rate (LIBOR) upon which rests the benchmark for market interest rates.
Oh yes, the same market that did such a good job evaluating counter-party risk that two major investment banks went technically insolvent, and the rest came damn close. As soon as you remove the government, the rain will be gone, their eyes will be clear! We've never had a situation where the Federal Reserve didn't exist, and there was a financial crisis handled imperfectly by, let's say, JP Morgan. You based your entire assumption, of one school, on the thoughts of one member, who looks like he was quoted out of context? Without even bothering to research into any relevant facts or mathematical derivations? Sounds like a typical Paulite/Austrian to me. Dismissing models based on wishy-washy psychological feeling is typical. While I don't think the excessive mathematics in economics these days is healthy, dismantling an entire school without any look into the math or empirical facts is very daring indeed.
Which is why you shouldn't have fractional reserve banking. Banks guarantee the deposits of their customers and as such it should be considered fraud it they don't have them... Look, I just think the Austrians make more sense - don't take it personally. Also, I don't agree with everything they say (e,x, going back to a gold standard)...
Yeah? Private banks printing their own currency, that has never happened before. http://en.wikipedia.org/wiki/Wildcat_banking
So, we should have currency-board like 100% reserve private banks? Who regulates that standard, if not the Federal Reserve or some other entity? I don't take anything personally. If you think the Austrian school makes more sense, that's fair enough. However, it in no way validates your attack on the Keynesian school. If you came with points like the empirical validity of sticky wages and prices, I could actually agree with you, as I attack the New Keynesian model from the left. As long as you keep on citing some random video to ridicule a New Keynesian based on personal feelings, I can't help myself from trying to help you see the light.
What does this have to do with anything? When did I say I don't believe in only one national currency?...
"Sound money" is usually a paraphrase for a combination of competitive monies such as private bank notes---you might to read up what Ron Paul actually wants to do.
