Alex,
Your knowledge of the individual aspects of monetary economics is fine. I'd quibble with some niggling things here and there on the smal micro level points... but it would mostly be fairly small scale shadings and what not. That said, it would seem like you've got a good view of the trees, but have lost a little sight of the forrest, in my opinion. I view Mr. Paul's views on monetary economics (admidly mostly non-specific and inferred from others reporting on it) as borderline tin-hat-ish. One of the single most valuable assets the U.S. has is its role as THE currency of record in the global economy. This position comes about due to the vast credibility it is afforded in global markets. To toss this out the window out of some nostalgia for bye-gone days is tantamount to scrapping all the cars for horses and buggies... because didn't they just work well enough back in their day, damnit.
To point to mistaken attempts at the utilization of fiat currencies from the past as clear indication of this nostalgia view of the world. Fact is, monetary policy is a technology just like any other. It is a skill that has required development just like any other. Just because those absurd flapping wing air machines from the 1850s won't fly and would kill ya doesn't mean you shouldn't fly business class in a 767 today.
We have already discussed the relative weaknesses of using a commodity with uncontrolled levels of supply (and non monetary sources of demand) as the foundation of a currency regime, so we don't need to rehash it completely again (the gold and silver found in the "new world" that flooded into spain was a large contributing cause of the end of Spain's position as a global power). THere is actually a REASON that every monetary system in the world today is either directly fiat or indirectly (as in they tie themselves to the DOLLAR rather than to a commodity)... commodities and their prices are too damn eratic. If any country were going to forray back into commodity based systems... it sure as hell shouldn't be the US or other global powers whose monetary authorities currently command great credibility with the markets, it certainly WOULD be one of the small eratic currency regimes that are unable to command any authority with the markets when they announce monetary targets (that are inherently not perfectly observable)... but for some reason every country in that position that chooses to retreat from the pure fiat based regime chooses to back itself with DOLLARS rather than commodities. Hmm.
now, because I can't resist quibling
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Originally Posted by alexamenos
MD -- you stated that fiat currencies are modern concept. I referenced a fiat currency from 1,000 years ago to demonstrate that they aren't a modern concept.
You state this fiat currency was only in exsitence for "a short period of time." Not only do I not disagree, but this is exactly my point.
I don't know what you mean.
if we asked milton friedman or alan greenspan which was the more accurate measure I'm fairly certain that m2 would be the answer.
it is arbitrary to draw a line between money *immediately* available and money available after a few days, weeks, or even months. In either case the money is part of the overall supply of money.
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agreed
although an increasing money supply is not in and of itself an indication of an inflationary monetary policy (as we discussed above). there is money SUPPLY, and you can't determine whether a certain level is inflationary without talking about what is happening with money DEMAND, which intrinsically increases over time in a non-stagnant economy
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...the m1 supply has not been static, but has instead increased by more than 30% over the last decade, or slightly less than 3% (a number which not too surprisingly corresponds to FED published consumer price index rates over the last decade).
lessee....r-sq of cpi regressed on m1 = 99%....that is, 99% of the variability in the consumer pice index is explained by the supply of m1 over the last 45 years. The data is readily available on the web, and this process took me about 5 minutes -- you can check my math if you like.
Hence, inflation is unquestionably closely related to the supply of m1 (and that's by the US BLS's own exceedingly lame measures of inflation, measures which begin with the assumption that price increases are often the result of something other than an increase in price).
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you gotta be careful here. Money and prices are by definition tied in together, to look at correlation, and then asign causation is dangerous territory. once there is inflation in an economy (for whatever initial reason) it becomes embedded, at which point a non-recessionary monetary policy implies assuming that existing level of inflation... this means that inflation causes MS increases, not the other way around.
that said, it is basically true (by definition) that you can't have inflation i the long run without a monetary policy that accomodates it.
the thing is that the fed doesn't pursue a zero inflation target for its montary policy... but this isn't a bug its a FEATURE. Low levels of inflation allow the economy to absorb small real shocks as monetary or price changes, rather than as real changes (as in, scaling back production and firing workers). This is a good thing. Ask the Japanese which they prefer... 2% inflation or 2% deflation?
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I'm sure I'd enjoy a conversation with your six year old, I gather he knows at least as much about macro economics as you.
cheers
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I gotta go now... but I'm sure you won't take THIS sitting down
