Posted on 11/18/2005 6:43:11 PM PST by hubbubhubbub
Before Alan Greenspan retires I thought it might be worthwhile hearing what he thinks of money. Three years ago he gave a speech at the opening of an American Numismatic Society exhibition that I found on the Federal Reserve Bank website(1).
Greenspan reminds us, in no uncertain terms, that a monetary system based on fiat money amounts to no more than a confidence game. The value of fiat money is determined solely by our confidence in the issuers of that money or, more specifically, on how well the supply of fiat money is managed. If too much money is created the public will lose confidence in its purchasing power and the perceived value of the money can collapse. Remember, fiat money has no intrinsic value; it only has perceived value.
After you have read Greenspan’s speech, read the excerpts from a speech that Ben Bernanke made later that same year, and remember, he is going to be the next Federal Reserve Chairman.
The History of Money (1) by Alan Greenspan “The other day I told a spendthrift friend that I had to deliver a short address on the history of money. He responded, "I understand the history of money. When I get some, it's soon history." Fortunately, not all market participants are as spendthrift as my friend. Savers have been in sufficient abundance since the beginning of the Industrial Revolution to enable investment to further material well-being. Money, as a store of value, was an early facilitator of savings and one of the great inventions of mankind. Saving and investment is very difficult in a barter economy.
“The history of money is the history of civilization or, more exactly, of some important civilizing values. Its form at any particular period of history reflects the degree of confidence, or the degree of trust, that market participants have in the institutions that govern every market system, whether centrally planned or free.
“To accept money in exchange for goods and services requires a trust that the money will be accepted by another purveyor of goods and services. In earlier generations that trust adhered to the intrinsic value of gold, silver, or any other commodity that had general acceptability. Historians, digging deep into the earliest evidence of human practice, link such commodities' broad acceptability to peoples' desire for ostentatious gold and silver ornaments.
“Many millennia later, in one of the remarkable advances in financial history, the bank note emerged as a medium of exchange. It had no intrinsic value. It was rather a promise to pay, on demand, a certain quantity of gold or other valued commodity. The bank note's value rested on trust in the willingness and ability of the bank note issuer to meet that promise. Reputation for trustworthiness, accordingly, became an economic value to banks--the early issuers of private paper currency. “They competed for reputation by advertising the amount of capital they had to back up their promises to pay in gold. Those banks that proved trustworthy were able to broadly issue bank notes, along with demand deposits, that is, zero interest rate liabilities. The profit that accrued from investing the proceeds at interest was capitalized in the banks' market value. In the mid-nineteenth century, equity capital/asset ratios were often several multiples of today's ratios.
“In the twentieth century, bank reputation receded in importance and capital ratios decreased as government programs, especially the discount window and deposit insurance, provided support for bank promises to pay. And, at the base of the financial system, with the abandonment of gold convertibility in the 1930s, legal tender became backed--if that is the proper term--by the fiat of the state.
“The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability.
“Central bankers' success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency.
“If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen.”
I suspect that Alan Greenspan deliberately used oxen, and not gold, in the above paragraph so as not to cause panic buying of the yellow metal.
Now read Ben Bernanke’s comments and then decide for yourself whether you should own some gold, or not. Bernanke was talking about combating deflation, and we should not take his remarks out of context, but they are still instructive of the way our new Federal Reserve Board Chairman thinks. The full text of his talk is also available on the Federal Reserve Bank website(2).
“…under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
“The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
“What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
“Of course, the U.S. government is not going to print money and distribute it willy-nilly. Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
As I mentioned, we should not take Ben Bernanke’s comments out of context. At the time there was a real threat that the US could collapse into a deflationary depression following the bursting of the tech bubble. A deflationary depression is the last thing anyone wants and so, to prevent it, the Fed was dropping interest rates as fast as possible. The Federal Funds Rate (the rate at which banks lend federal funds to each other on an over-night basis) fell from 6.5% in 2000 to 1% in 2003. It was during this time that Bernanke made the speech I quoted above, in part to alleviate fears of a deflationary collapse.
The reason I think his speech is important is that the Federal Reserve had to take extreme measures in the aftermath of the tech bubble which, in the big scheme of things, was not all that big. To prevent a slowdown the Fed dropped the Federal Funds Rate from 6.5% to 1% in just three years and in doing so created a real estate bubble that dwarfs the tech bubble in every imaginable way.
As I mentioned last week, I think the US real estate market is ready to roll over and if it does the Federal Reserve will not have 5.5 percentage points by which to lower the Federal Funds Rate. The Effective Federal Funds rate is currently at 4%, and that brings us to Ben Bernanke’s speech. What will Ben Bernanke do to prevent a slowdown in the US economy when the real estate market finally cools down?
Paul van Eeden
..ah, yea; and keep plenty of ammo on hand for your weapons...you DO have weapons, don't you...????
Reagan80
Great argument! I'll put you down as one of Helicopter Ben's Printing Press Brigade. Happy Days are Here Again, we have invented the Printing Press! Thus spaketh Helicopter Ben, to his addle-brained believers!
Got your wheelbarrows yet, to catch your helicopter money from the fed?
(Do you think I'm kidding about Ben's helicopter money and the printing presses? He said it, not me.)
Investment in lead might be a good idea.
Come on Travis. Bernanke spoke to a hypothetical, called it a last resort with several options. Then the author made several unsupported assumptions to conclude that one of those options is needed to combat an upcoming economic collapse. Then you take all that several steps further and tell me, Ben said himself he was going to fire up the printing press, and that he will dump bails of it out of helicopters, then ask me if I think you're kidding?
I hope so.
bump
Those were his very words, Elfman. Not mine.
BTW, maybe you can give us a few examples of major world powers which ever funded year over year massive deficits by debasing their currency and printing unbacked fiat money?
Let's try Rome....nope.
France in the 18th century? Not quite. Just led to The Terror, and then Napolean.
Weimar Germany? Hmmmm....maybe not.
Maybe you can give us some examples of endless fiat currency leading to long term prosperity and stability?
Bernanke never said anything remotely like promissing to start tossing bales of money out of helicoptiers. You just made that up. You can't find it, can't show me. I thought you were more level headed that that.
If you're that nuts, I'm dissapointed. I'm not going to let you change the subject now by answering your misleading questions until you recogize that you can't find any words from Bernanke to that effect.
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
The U.S. Federal Reserve Board
Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
Wikipedia, internet encyclopedia
http://en.wikipedia.org/wiki/Ben_Bernanke
He gave a speech in 2002 entitled "Deflation: Making Sure 'It' Doesn't Happen Here" in which he discussed possible Fed actions to prevent deflation saying, "A money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." Further describing several options in the government's arsenal for fighting deflation Bernanke also said, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." These metaphors referred to the potential of the Fed to give money directly to citizens (as opposed to working through banks) as a last-resort possibility to stop deflation. Critics of Bernanke, calling him "Helicopter Ben," argue that he is too worried about deflation and too sanguine about its opposite, inflation.
Peter D. Schiff, Oct 28, 2005
http://www.newfuelnow.com/commentary/october2005/schiff1028.htm
"Helicopter Ben is No Paul Volcker"
(Excerpt)
Then there is the problem of propping up the dollar. With few exportable products creating demand for US currency, the trillions of dollars now in global circulation maintain their value only as a consequence of faith. For the last several years, that faith has in large part resulted from the near deification of Alan Greenspan. Whether justified or not, such faith will not simply transfer like a baton to Bernanke; it will have to be earned. Given the statements that Bernanke has already made with respect to the use of the invention of the printing press to create unlimited amounts of money at virtually no cost, his advocacy of the Fed doing whatever it takes to combat deflation, including the buying of long-term government bonds, stocks, real estate, and even consumer goods, such as automobiles, as well as his reference to dropping dollar bills from helicopters, which earned him the nickname “Helicopter Ben,” gaining the world’s confidence will not be easy.
But you just say “Bermale’s promising to start tossing bales of money out through hellocopters.” Bull crap! That's no more true than saying, “Rumsfeld is promising to nuke terrorists nations” simply because he cautiously listed it among more preferred options that would work if we were overrun.
And here’s emphasis on what you didn’t cherry picking from Bernanke that makes your remark a gross misrepresentation.
“Of course, the U.S. government is not going to print money and distribute it willy-nilly. Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”“…he discussed possible Fed actions to prevent deflation saying, "A money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." Further describing several options in the government's arsenal for fighting deflation Bernanke also said, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent)
Yeah, sure. The helicopter money ref was just a flippant off-the-cuff remark, picked at random, a little ad-lib in that famously light-hearted setting.
I got a bridge I want to sell you, cheap. No money down.
How do we have a conversation like this Travis?
I show with Bernake’s own words how he described it as an effective response to a hypothetical deflation, but one of “several options” that were more “preferred” and should not be done “willy-nilly”. But you say I told you it was “just a flippant off-the-cuff remark, picked at random, a little ad-lib in that famously light-hearted setting”. You did to me what you did Bernake. I think you need a vacation Travis.
Well said. I second your opinion.
Every syllable in Bernanke's 2002 Fed speech was parsed to the Nth degree. To speak of printing presses and "helicopter money" was deliberate. You can try to ignore the intent of those remarks, the world will not.
I agree. And obviously he was being outrageous. Did you miss that? “Money printing presses” and “helicopter drops” are shocking, implying recklessness or desperation, just as he warned.
Every word of that speech was calculated. That's why he will always and forever be known as Helicopter Ben.
I dont think anyone can understand any of the points you made.
"But fiat money is a "confidence game" that enables rapid creation of wealth"
Please tell me how you produce wealth by merely printing money?? By your logic counterfeiters produce wealth!
"The U.S. economy is, oh, about 8x what it was since we dumped the gold standard. I daresay the printing presses have helped made us the richest nation on Earth. In short: fiat sit!"
And what is U.S growth on debt in that timeframe? I dare say many multiples of 8X.
As long as oil is tranacted in $US the con game can go on. When a producer decides they want something else in payment, the jig is up. Let the presses roll til then. LOL
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