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What Would the United States Look Like Wthout the Federal Reserve
American Banking News ^ | September 2, 2009 | The Editors

Posted on 09/03/2009 4:39:19 PM PDT by all the best

Since H.R. 1207 was introduced by Dr. Ron Paul in Congress this February, there has been a growing movement questions whether the Fed should continue to operate without more oversight and some question whether or not the Federal Reserve should continue to operate at all.

Currenty, Paul’s “Audit the Fed” legislation has 282 co-sponsors and there are two similar pieces of legislation in the senate. If the legislation is passed, it will allow the Government Accountability Office (GAO) to review the Federal Reserve’s balance sheets and their policy deliberations and monetary transactions. Currently Federal Reserve Chairman, Ben Bernanke, opposes the plan, saying it would undermine the Fed’s independence.

The “Audit the Fed” act has a real chance in passing, but some supporters of the legislation, including Ron Paul, want to take it further than that by ending the Federal Reserve all together. Paul introduced a piece of follow-up legislation, entitled H.R. 833: The Federal Reserve Board Abolition Act which would wind down and eliminate the Federal Reserve over the course of the year. Currently, the act has no co-sponsors, but is gaining a lot of grass-roots support. Paul hopes that members of Congress will join his movement to end the Federal Reserve after they see the results of a full audit of the Federal Reserve. Paul also authored a book about his proposal to end the Federal Reserve, entitled “End the Fed.”

Although the movement is in its infancy and still gaining momentum, it’s not too crazy to think that the United States wouldn’t be better off without the Federal Reserve. Since the Federal Reserve System was brought into force into 1914, the United States economy has grown at a slower pace than it did before 1914, despite significantly improved productivity. The rate of inflation has been substantially worse since...

(Excerpt) Read more at americanbankingnews.com ...


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: banking; economics; fed; federalreserve
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To: Toddsterpatriot
A recession is a decrease in output. How is that caused by new money flooding into housing?

Malinvestment. Right now money being loaned for real estate at 5% (should be 15%) is not being loaned to small businesses except through politicized channels. Another effect is that materials currently being used to oversupply real estate (new houses are literally being built next to empty houses) are being diverted from the rest of the economy resulting in prolonging the recession or setting up the next recession.

121 posted on 09/07/2009 11:28:30 AM PDT by palmer (Cooperating with Obama = helping him extend the depression and implement socialism.)
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To: wagglebee
Your opinion that deflation is somehow a good thing is typical of many who subscribe to the Utopian fantasy of the “Austrian school”.

There is no utopia in earth. Not now, and not with a gold standard. Anyone who believes there is, is sadly mistaken. But that doesn't mean we shouldn't look at alternatives to a centrally planned monetary system that has proven to be seriously flawed.

And for the record, invested capital WOULD NOT grow because NOBODY would buy ANYTHING other than the bare essentials.

Sorry, I don't buy that for one minute. People would not stop wanting stuff just because they believe it will be cheaper in the future. Look at computers and electronics in recent years. Booming industries despite continuously deflating prices. Everybody knows that next year's models will be better and likely cheaper, yet they still buy now. Why? Because it's human nature to desire stuff NOW over having stuff LATER. That's why savers, in a free market, are rewarded rather than punished.

122 posted on 09/07/2009 11:40:28 AM PDT by Swing_Thought (The doorstep to the temple of wisdom is a knowledge of our own ignorance. - Benjamin Franklin)
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To: Swing_Thought

Technology is an anomaly because people believe they DO need it now. Also, we are talking about deflationary periods, when deflation is the exception, not the rule.

Please cite a SINGLE instance in recorded history where an economy has flourished in a deflationary period. If what you BELIEVE is so valid you shouldn’t have any difficulty providing an example.


123 posted on 09/07/2009 11:46:22 AM PDT by wagglebee ("A political party cannot be all things to all people." -- Ronald Reagan, 3/1/75)
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To: Toddsterpatriot
How did that work during the Great Depression? Anyone with savings did benefit when prices dropped about 25% between 1929 and 1933. Unless their bank failed. Unless they lost their job.

Recessions/depressions are corrections. They correct for malinvestments made during the preceding booms. Of course they are painful, just as is a hangover. The key to avoiding the pain is avoiding the excessive partying in the first place.

My point is that when the central bank chooses to err on the side of creating inflation in order to avoid deflation, the deflation they're trying to avoid is a bugaboo. There's nothing wrong with price deflation occurring as a result of increased productivity. There was a long period of general price deflation in the late nineteenth century. Yet the industrial revolution still took place.

124 posted on 09/07/2009 11:51:09 AM PDT by Swing_Thought (The doorstep to the temple of wisdom is a knowledge of our own ignorance. - Benjamin Franklin)
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To: Toddsterpatriot
There were 9 recessions or depressions between 1865 and 1900, totaling 229 months out of about 430 months.

The great depression lasted for sixteen years or so (depending on when you think it actually ended), and it brought us countless new government interventions which we've been suffering from ever since. We have yet to know how this latest one will play out. It may end up being worse.

So you'd have 0% reserves on time deposits?

What I'd "have" is irrelevant. In a free market bankers would be free to choose how they do business. As a consumer, I'd be looking for one with an excellent reputation for honesty and sound business judgment. I'd be more likely to frequent a bank which was well capitalized. I'd want the option of withdrawing my funds, including those at risk because they were lent out, even if the banker were to charge me a fee for early withdrawal. Obviously, the banks with reserves would be better able to do so. I'm sure the free market rating agents would rank them more highly WRT safety. As a conservative investor, I'd be more likely to go with the banks rated highest for safety.

Deflation is a decrease in the general price level. If all prices drop, how is that a result of improved productivity?

Yes, that would be general price deflation. It can be brought on by increased productivity, or it can be brought on by monetary deflation (a drop in the supply of money), or by both at the same time.

Computer prices dropping every year is because of increased productivity and that is a good thing. Prices dropping every year because of a shrinking money supply is a bad thing.

Agreed. But ask yourself why the latter happens. It's because of the preceding over expansion of the money supply, which now requires correction. Avoid the excessive partying and you avoid the hangover.

What would you invest in during long term deflation?

I'd look for the right mix of investments to suit my personal risk/reward mindset. Same strategy as during a time of inflation or price stability.

What business will expand during long term deflation?

Businesses that do the best job of satisfying their customers and believe that they can do more business in the future by expanding operations. Same as in periods of general price inflation or price stability.

If my employer has to reduce prices every year, I'd be lucky to keep my job and if I kept it, I'd be lucky to keep the same salary.

Well, your salary might go down, but as long as it didn't drop more than the general prices level you might be better off since your dollars would buy more. I don't see why you think you'd lose your job though... I'm sure you're very valuable to your employer.

The point is that the fear of general price deflation - when it occurs naturally and not as a consequence of a preceding over expansion of the money supply - is irrational. If the value of money is increasing, the market will adjust.

You can't look only at the outputs. Sure, if a business is pulling in fewer dollars because the general price level is decreasing, at first glance that's bad for business. But remember that the business' COSTS are also decreasing.

125 posted on 09/07/2009 12:21:35 PM PDT by Swing_Thought (The doorstep to the temple of wisdom is a knowledge of our own ignorance. - Benjamin Franklin)
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To: Toddsterpatriot

What do you think? Will hundreds of competing currencies survive in the free market?


126 posted on 09/07/2009 4:50:46 PM PDT by Jabba the Nutt (Are they insane, stupid or just evil?)
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To: palmer

I bet the Fed will stop QE by the end of October.


127 posted on 09/07/2009 4:58:00 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: palmer
A recession is a decrease in output. How is that caused by new money flooding into housing?

Malinvestment.

Malinvestment of new money doesn't cause a decrease in output.

128 posted on 09/07/2009 5:08:36 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Swing_Thought
The key to avoiding the pain is avoiding the excessive partying in the first place.

And we know that the absence of a central bank did nothing to avoid the excessive partying.

There's nothing wrong with price deflation occurring as a result of increased productivity.

Price deflation due to increased productivity is a good thing. Price deflation due to a shrinking money supply is a bad thing.

There was a long period of general price deflation in the late nineteenth century.

And that deflation crushed farmers and business owners who needed to borrow money for their business.

129 posted on 09/07/2009 5:17:41 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot
Malinvestment of new money doesn't cause a decrease in output.

Eventually it does. Normally we would have to wait for the bust that follows the boom. Now the malinvestment wastes resources and cuts output right away. The government is literally digging holes and filling them back in which raises the price for anyone else digging for reason (i.e. to increase output).

For the QE bet, see you in early November.

130 posted on 09/07/2009 5:40:35 PM PDT by palmer (Cooperating with Obama = helping him extend the depression and implement socialism.)
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To: Swing_Thought
In a free market bankers would be free to choose how they do business.

You said you wouldn't use a bank that practiced fractional reserve banking. Then you said you want your bank to lend out time deposits. Time deposits require 0% in reserves. So why is 0% reserves better than a higher reserve requirement?

As a consumer, I'd be looking for one with an excellent reputation for honesty and sound business judgment.

Is the bank lending out your deposit or are you?

What would you invest in during long term deflation?

I'd look for the right mix of investments to suit my personal risk/reward mindset.

What suits your personal risk/reward mindset during long term deflation?

131 posted on 09/07/2009 5:40:48 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Swing_Thought
Well, your salary might go down, but as long as it didn't drop more than the general prices level you might be better off since your dollars would buy more.

So if my $60,000 salary drops to $54,000, I'd be okay as long as the general price level drops 10%?

132 posted on 09/07/2009 5:41:18 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Jabba the Nutt
What do you think? Will hundreds of competing currencies survive in the free market?

Back up. Is your idea of a free market monetary system to have hundreds of competing currencies?

133 posted on 09/07/2009 5:44:01 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: palmer
Malinvestment of new money doesn't cause a decrease in output.

Eventually it does.

We're not talking about eventually. The claim was, "Our current recession is caused by the flooding of new money into the housing market"

How can you agree with that claim?

134 posted on 09/07/2009 5:49:53 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot

The claim is poorly worded. The current recession was caused by factors present in 2007 (mostly) so it can’t be caused by something happening currently.


135 posted on 09/07/2009 6:05:46 PM PDT by palmer (Cooperating with Obama = helping him extend the depression and implement socialism.)
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To: palmer
The claim is poorly worded.

Excellent! Something we can agree on.

136 posted on 09/07/2009 6:10:07 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot
So if my $60,000 salary drops to $54,000, I'd be okay as long as the general price level drops 10%?

Depends on what you want to spend your money on, doesn't it? The price level on everything doesn't drop (or rise during an inflation) uniformly.

You said you wouldn't use a bank that practiced fractional reserve banking. Then you said you want your bank to lend out time deposits. Time deposits require 0% in reserves. So why is 0% reserves better than a higher reserve requirement?

I also said I'd want to use a well capitalized bank. Such a bank would have it's own cash, held in reserve, to make available to time depositors who wished to be released from their time deposits early. They would likely charge an early withdrawal fee, of course. They might also, at times, deny early withdrawals if their "reserves" got too low.

Is the bank lending out your deposit or are you?

It's not an either/or situation, in my view. Assuming we're talking about a free market banking system, a banker could be acting as a broker, in the strictest sense of the word, in which case I would be lending the funds and taking the risk. Or the bank could be lending my time deposit and taking on some or all of the risk of default.

What suits your personal risk/reward mindset during long term deflation?

Depends upon my reading of the future. Assuming I see minimal risks of a wide scale economic catastrophe, since I'm a conservative investor with most of my wealth so I'd be looking for investments likely to maintain their value with low risk of default. I'd likely speculate, as I do now, with a smaller portion. I would expect that I would have a conservative mix of bonds, dividend paying stocks, growth stocks and cash.

And we know that the absence of a central bank did nothing to avoid the excessive partying.

Fractional reserve banking can and did exist without a central bank. But it is more difficult, in this situation, because banks which expand too rapidly can run out of business by banks that don't. When the over extended banks are called upon to pay in specie, they'll have a problem. This is one reason why the banking establishment likes a central bank to set the rules for everybody, so all can expand at the same rate.

Price deflation due to increased productivity is a good thing. Price deflation due to a shrinking money supply is a bad thing.

The answer is don't over expand the money supply in the first place.

And that deflation crushed farmers and business owners who needed to borrow money for their business.

Maybe the farmers who couldn't make it should have saved more, or gone into a business that required less capital.

You sure ask a lot of questions. Let me ask you a couple.

Do you think the federal government is too large and involved in the everyday affairs of Americans?

Do you see any connection between the ability of the FED to create money out of thin air and the size of the federal government?

137 posted on 09/08/2009 1:00:50 AM PDT by Swing_Thought (The doorstep to the temple of wisdom is a knowledge of our own ignorance. - Benjamin Franklin)
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To: Swing_Thought
So if my $60,000 salary drops to $54,000, I'd be okay as long as the general price level drops 10%?

Depends on what you want to spend your money on, doesn't it? The price level on everything doesn't drop (or rise during an inflation) uniformly.

The $200,000 home I bought with a 6% mortgage, which is now worth $180,000 still has the same mortgage payment.

Am I still okay because my salary only fell as much as the general price level?

It's not an either/or situation, in my view. Assuming we're talking about a free market banking system, a banker could be acting as a broker

In that case, your bank's reputation for honesty and sound business judgment is irrelevant.

What suits your personal risk/reward mindset during long term deflation?

Depends upon my reading of the future.

The future is a 2% drop in prices every year. Now what do you invest in?

Price deflation due to a shrinking money supply is a bad thing.

The answer is don't over expand the money supply in the first place.

Sounds easy. LOL!

Maybe the farmers who couldn't make it should have saved more, or gone into a business that required less capital.

Or maybe a central bank should have prevented crushing deflation?

Do you think the federal government is too large and involved in the everyday affairs of Americans?

Yes.

Do you see any connection between the ability of the FED to create money out of thin air and the size of the federal government?

Only to the extent that the Fed helped grow the size of the economy.

138 posted on 09/08/2009 5:50:33 AM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot
Do you read what I write below you reply? I've made that mistake before.

My point is that in freedom, you don't know, can't know how it is going to work out. The only people who know how it's going to work out are socialists and other totalitarians.

Think for yourself, do you think there will be hundreds of competing currencies at your local grocery? Does that make sense?

139 posted on 09/08/2009 6:36:52 AM PDT by Jabba the Nutt (Are they insane, stupid or just evil?)
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To: Jabba the Nutt
Do you read what I write below you reply?

Yes, and I'm still waiting for your definition of monetary freedom.

Think for yourself, do you think there will be hundreds of competing currencies at your local grocery? Does that make sense?

It's your desire, you tell me.

140 posted on 09/08/2009 6:50:41 AM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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