Audit the Fed: Good or Bad Idea?

[CAC1001]

Also you talk about gold being worthless: central banks are buying up the stuff.

By "worthless" I mean it serves no purpose in society. It DOES have value, I mean if you have a stack of bars of gold, you've got some serious money there, but it's only valuable because people say its valuable. There's no real use for it.

These are the facts: they are happening right now. You keep going on about monetary and fiscal policy without giving any specifics or any original arguments.

See my previous post.

You talk about gold being based on faith, yet you are not even aware that gold was confiscated by people after the great depression and then the paper which you so "preciously" put your faith in lost 40% of its value when things were re-pegged.

I don't put my faith in paper, I put it into the economy. Historically, in times of real economic collapse, high-quality jewelry has shown itself to be very valuable, but gold, not necessarilly. Gold didn't do the Chinese families in China much good when the Japanese invaded. High-quality jewelry, however, was tradeable.

You seem to forget these kind of details when you are making your arguments about how the so called "faith" of paper currency can remain strong. You point out that somehow the US economic experiment is somewhat "special" in comparison to the others. You have also been pointed out that every fiat currency known throughout history has failed.

Every fiat currency throughout history has not failed. A lot have, and that's because a lot less was known about economics at the time. A modern economy canot function without a fiat currency.

You also talk about the currency being in circulation for a long time.

Which means that the US has only been off the gold standard for roughly 40 years. This means that you have only had a "real" fiat currency for 40 years.

Yes.

The other thing you also neglect is that the US dollar has "tremendous value" in terms of being the reserve currency for oil and energy transactions (amongst other things). You do know how you benefit from this right?

Yep.

As mentioned before, there are agreements happening right now that do trade in these "real assets" (ohh wait you said they don't exist) that is done in other currencies. But I guess these are based on faith right?

Oil and energy are real assets because people don't just "trust" that they have value, they have value because people really NEED them. It's like valuing food versus valuing gold. Both can be valuable, but the one is something required to solve a need, the other isn't. Now if gold has a lot of value based solely on pure supply and demand, where it is demanded because it solves some type of need, then fine, but it's value, unlike oil or food, is not based on filling a need. If oil was no longer needed for the industrial economy, it would be worthless. Gold is not needed for the economy, and only has a minor need for use by rich people for their homes and jewelry, so it is basically the equivalent of a worthless metal that is given enormous value anyway. Gold could have a lot more value if it wasn't so rare as then it could be used widely in industry.

But you still tell yourself that your economy is so strong, even when the international markets are "reacting" by dumping treasuries, creating bi-lateral trade agreements of their own (including Indian trade agreements with Iran in terms of, you guess it, gold), and contributing to the demise of the petro-dollar and the US dollar.

An economy can be measured on how many people "trade" in that currency. You currency is still strong now, but the examples above show that it is declining. How in your own specific opinion, is this is a sign the economy is not shrinking when entire nations are deciding to trade in other currencies?

The U.S. economy isn't shrinking and while those are concerns, they are because of the current idiocy in government and can be fixed.

 

[chiro]

There are some slight contradictions here: I mentioned that for example an electricity utility is an asset in which you went on a tirade about the so called "value" argument, but now you are saying that oil is an asset because it's something people need. You have changed your stance 180 degrees from only a few posts ago.

You also talk about gold serving no purpose in society. Gold does have limited uses industrially (one specific one is in electronics), but the point of gold was to be a medium of exchange and a store of value, not an actual asset that has any kind of industrial or otherwise similar use.

This is important to realize because you keep making the same mistake with regarding gold: it is not meant to be an asset in an industrialized sense or a natural resource in a typical sense like food, energy, and so on. Gold was meant to be a store of value and a medium of exchange, just like paper.

Also the point of gold was that it was able to with-stand "irresponsible printing" of currency by a single entity. In currency 101, one of the most important elements of a currency is the ability for that currency to withstand counterfeiting, since the ability to counterfeit removes the trust aspect of the currency and therefore makes it worthless since the whole point of a currency is to be a medium of exchange that people can agree on.

Do you know the properties that a good currency and medium of exchange should have? If you do, you'll see why gold was chosen to fit this role. This is why central banks buy it up, because they know how its use in terms of a real currency and unit of exchange is valuable.

Your paper money is exactly the same as gold and you fail to acknowledge it: you can't eat paper either, or put it in your car, but as a medium of exchange, it is used. Paper is backed completely by faith, and this idea of measurability is a facade because first of all: not all the information is available and secondly the tendency to hide information that would be otherwise detrimental to a particular party is hidden by that party if it is in their interests.

Even if we generously leave the last assumption out, you can't rule out the first.

You also say you put your faith in the economy and not the paper: well the paper is the measure of the economy. It is the units that are used to represent the state of the actual economy. The faith in economy is directly realizeable by how many units of exchange are not only in circulation, but also the nature of such circulation.

 

[CAC1001]

There are some slight contradictions here: I mentioned that for example an electricity utility is an asset in which you went on a tirade about the so called "value" argument, but now you are saying that oil is an asset because it's something people need. You have changed your stance 180 degrees from only a few posts ago.

Not at all. Oil and electricity people need. If I argued that electricity is worthless or if that's how you interpreted it, then I must have typed wrong, if so sorry.

You also talk about gold serving no purpose in society. Gold does have limited uses industrially (one specific one is in electronics), but the point of gold was to be a medium of exchange and a store of value, not an actual asset that has any kind of industrial or otherwise similar use.

This is important to realize because you keep making the same mistake with regarding gold: it is not meant to be an asset in an industrialized sense or a natural resource in a typical sense like food, energy, and so on. Gold was meant to be a store of value and a medium of exchange, just like paper.

Yes, but that means that it is mostly worthless and just has value because people say it has value. Lots of things can become a medium of exchange if it is valued by people. In prisons, low-quality cigarettes tend to serve as the medium of exchange for example.

Also the point of gold was that it was able to with-stand "irresponsible printing" of currency by a single entity. In currency 101, one of the most important elements of a currency is the ability for that currency to withstand counterfeiting, since the ability to counterfeit removes the trust aspect of the currency and therefore makes it worthless since the whole point of a currency is to be a medium of exchange that people can agree on.

Do you know the properties that a good currency and medium of exchange should have? If you do, you'll see why gold was chosen to fit this role. This is why central banks buy it up, because they know how its use in terms of a real currency and unit of exchange is valuable.

Your paper money is exactly the same as gold and you fail to acknowledge it: you can't eat paper either, or put it in your car, but as a medium of exchange, it is used. Paper is backed completely by faith, and this idea of measurability is a facade because first of all: not all the information is available and secondly the tendency to hide information that would be otherwise detrimental to a particular party is hidden by that party if it is in their interests.

Even if we generously leave the last assumption out, you can't rule out the first.

You also say you put your faith in the economy and not the paper: well the paper is the measure of the economy. It is the units that are used to represent the state of the actual economy. The faith in economy is directly realizeable by how many units of exchange are not only in circulation, but also the nature of such circulation.

I agree that paper money becomes worthless if the economy completely dissolves. But gold doesn't necessarilly retain any value in such a situation either, and gold-backed paper money won't do much good in such a situation. Paper money is backed by more then faith though. We don't just use paper money because of some blind assumption that it has value. It is a trusted currency because it is the medium of exchange for the most powerful economy in the world.

 

[chiro]

Absolutely agree about the cigarette example (as this kind of thing is forced to happen when currencies collapse in normal societies let alone one like a prison). But there is a big difference between a medium of exchange (like a currency) and an actual exchange of goods and services.

The paper money is more of a place-holder or in some ways a "receipt" rather than something tangible or useful. In the prison example, this is closer to a "barter" system than an actual currency and there are important distinctions between the two. The way that paper money was created was to avert the need to carry around a lot of gold and the bankers created these receipts out of convenience. Mediums of exchange are not the same as the exchange itself and although you can do exchange without having a medium like a receipt with its own trust, the receipt is never the same as the actual good or service itself.

Having said that there are some real fuzzy boundaries going on, but it is important to separate the idea of a receipt and an actual good or service in the same way that barter economies are differentiated from non-barter economies.

 

[Artus]

Gold standard is just a reference. Money could be backed bu Gold, Silver, or any other standard than debt.

 

[chiro]

Gold standard is just a reference. Money could be backed bu Gold, Silver, or any other standard than debt.

Agreed.

One thing about silver is that there has been this historical parity value between silver and gold which means that if gold price has an agreed value then the silver will implicitly also have a value as well.

It's not some kind of law or anything like that, but it has been useful throughout history to have a metal for divisions of lower value currencies.

 

[SixNein]

Gold standard is just a reference. Money could be backed bu Gold, Silver, or any other standard than debt.

Money is backed by trust and trust alone.

 

[Dotini]

Romney has now endorsed an audit of the Fed. Dr Paul's ideas are slowly co-opted into the official Republican platform.

http://www.washingtontimes.com/blog/inside-politics/2012/aug/20/romney-supports-audit-fed/

Respectfully submitted,
Steve

 

[lisab]

Money is backed by trust and trust alone.

Yep. Probably the most fascinating thing about money, IMO.

 

[Ryan_m_b]

The paper money is more of a place-holder or in some ways a "receipt" rather than something tangible or useful. In the prison example, this is closer to a "barter" system than an actual currency and there are important distinctions between the two. The way that paper money was created was to avert the need to carry around a lot of gold and the bankers created these receipts out of convenience. Mediums of exchange are not the same as the exchange itself and although you can do exchange without having a medium like a receipt with its own trust, the receipt is never the same as the actual good or service itself.

As an aside societies that function on barter economies have never existed. The first currencies were systems of credit, mediums of exchange were developed as standardised units but for a long time in history were never traded themselves. So person A may have traded item X for 10 silver at the local temple but 10 silver wouldn't go anywhere, in fact 10 silver doesn't even have to exist.

Money is just a form of debt, a way of transfering goods and services between individuals. It doesn't have to be tied to a phyiscal commodity anymore than an I.O.U does.

 

[chiro]

As an aside societies that function on barter economies have never existed. The first currencies were systems of credit, mediums of exchange were developed as standardised units but for a long time in history were never traded themselves. So person A may have traded item X for 10 silver at the local temple but 10 silver wouldn't go anywhere, in fact 10 silver doesn't even have to exist.

Money is just a form of debt, a way of transfering goods and services between individuals. It doesn't have to be tied to a phyiscal commodity anymore than an I.O.U does.

Absolutely agree that it doesn't and according to the book "Debt: The first 5000 years" there were instances of systems where no real unit of exchange was used as the whole thing was based on a benevolant society where people just gave others what they needed and didn't worry about being "paid" or being "reimbursed".

There are of course ideologies that say that you should do exactly this to your family, your friends, and yes, even your religious buddies in some cases but for everyone else, whip out the contracts, and the money and never ever be indebted to someone and make sure you are owed what you give.

But really the thing about silver is not the silver itself: it's as you say what the silver means in the context of a currency. Silver (and to some extent gold but not as much) has a lot of industrial uses and most silver is used for that very purpose in all kinds of things, but the thing of silver (and gold) was that it met some of the criteria of a good currency being that it could be divided, it was really hard to counterfeit, and so on.

People used (and still do) these currencies because of the above, not because it's shiny or something along those lines.

The thing though is that not all currencies are equal and this is what this thread was partially about.

You might be interested that China is going to bring online a gold exchange where they store all the physical (PANAM) and now the commodities markets are taking gold as a form of collateral.

Remember the thing is that as you pointed out, it's about the trust and when the printing press gets abused, thing's revert back to a situation where some kind of trust can be established, and in a lot of cases that translates to using metal based currencies.

 

[Tosh5457]

What do people think of the Audit the Fed bill which overwhelmingly passed in the House last week? Good idea or bad idea? Why or why not?

The Fed has many connections with top bankers, so its potential to do corruption is very high. Besides, as others have pointed out already, it's a private institution that has a huge influence in the economy, so the public should at least be assured that it's being well managed according to its objectives. But I want to know who's going to do the audit...

 

[ApplePion]

What are the Ron Paul people expecting to find by auditing the Fed? The Fed is *allowed* to create money out of nothing. Their books do not have to balance.

I note that Ron Paul had been ranting that he was kicking Romney's behind because it is delegates that mattered, and most of the delegates (except perhaps those that were secretly members of the Fed?) were really Ron Paul supporters. Ron Paul has also claimed that he is the only candidate who supports the Constitution. There really needs to be some sort of "audit" of Ron Paul.

P.S. Will Donald Trump demand to see the Fed's birth certificate?

 

[mheslep]

What are the Ron Paul people expecting to find by auditing the Fed? The Fed is *allowed* to create money out of nothing. Their books do not have to balance.

...

The Fed was created mainly to set monetary policy and provide financial stability. They have stepped far beyond that role now into fiscal policy and, arguably, social policy by way of mortgage rebates, buying up debt and the like. I agree in its role of money printer the Fed should be independent of political oversight as a hint of political control of currency value would be disastrous. Fiscal policy however is traditionally executed by the Congress and the Executive. Those institutions are, and should be, subject to scrutiny by the voters. As the Fed takes on those roles it should suffer the same scrutiny.

Apropos:
John Cochrane: The Federal Reserve: From Central Bank to Central Planner

 

[ApplePion]

<<The Fed was created mainly to set monetary policy and provide financial stability. They have stepped far beyond that role now into fiscal policy and, arguably, social policy by way of mortgage rebates, buying up debt and the like.>>

The intent was always that they would buy debt. Indeed, when you hear that they are loweing the Fed Funds rate target, they are actually buying debt to skew the market. Perhaps though you can argue that mortgages are a social form of debt. But on the other hand, the goal of buying up mortgages really does fall into the category of attempting to achieve fiscal stability.

But why would Ron Paul need to go auditing the Fed to find these things out? If they have been buying motgages, is it a secret? What does he expect to find?

I should point out that I actually do not think there should be a federal Reserve. But even though Ron Paul and I actually agree on that, his views are strange conspiratorial views.

P.S. I note your link to John Cochrane's article. JC and I lived in the same dormatory many years ago back when we were undergrads at MIT. He is now in finance, but actually was a physics major back then.

 

[mheslep]

<<The Fed was created mainly to set monetary policy and provide financial stability. They have stepped far beyond that role now into fiscal policy and, arguably, social policy by way of mortgage rebates, buying up debt and the like.>>

The intent was always that they would buy debt. Indeed, when you hear that they are loweing the Fed Funds rate target, they are actually buying debt to skew the market.

Yes, but bank debt over is the traditional way the Fed pushes money into economy (or draws it down), not US government debt and mortgages.

Perhaps though you can argue that mortgages are a social form of debt. But on the other hand, the goal of buying up mortgages really does fall into the category of attempting to achieve fiscal stability.

Sure, and social policy, a step too far.

But why would Ron Paul need to go auditing the Fed to find these things out? If they have been buying motgages, is it a secret? What does he expect to find?

I should point out that I actually do not think there should be a federal Reserve. But even though Ron Paul and I actually agree on that, his views are strange conspiratorial views.

I agree w/ your criticism of Paul the elder. Like many cranks, he has latched on to a valid but complex idea and attached to it the baggage of naivety and conspiracy.

P.S. I note your link to John Cochrane's article. JC and I lived in the same dormatory many years ago back when we were undergrads at MIT. He is now in finance, but actually was a physics major back then.

Yes I was aware of Cochrane's science background and as an engineer myself I'm all the more interested in his views.

 

[ApplePion]

<<Yes I was aware of Cochrane's science background and as an engineer myself I'm all the more interested in his views.>>

Apparently JC has gone off the deep end--he is affiliated with the Cato Institute. Back at MIT he was actually very liberal and I was very conservative, and we had some political discussions.

But the problem with Cato is not that they are conservative. It is that they are dishonest and irrational.

 

[mheslep]

<<Yes I was aware of Cochrane's science background and as an engineer myself I'm all the more interested in his views.>>

Apparently JC has gone off the deep end--he is affiliated with the Cato Institute. Back at MIT he was actually very liberal and I was very conservative, and we had some political discussions.

But the problem with Cato is not that they are conservative. It is that they are dishonest and irrational.

That sounds ridiculous. Cochrane has a large body of scholarship to his name and continues to publish, but you state here he as gone 'off the deep end' not because of anything he's said or written but because of someone with whom he's affiliated? BTW Cato has a libertarian viewpoint, not conservative.

 

[ApplePion]

<<That sounds ridiculous. Cochrane has a large body of scholarship to his name and continues to publish, but you state here he as gone 'off the deep end' not because of anything he's said or written but because of someone with whom he's affiliated?>>

Yes, I do think that who someone choses to affiliate themselves with is reflective of them. If someone chose to be an official economist for the American Nazi Party, would that not make such a person suspect to you? Yes, I realize that the Cato Institute is not nearly as bad as the Nazi Party, but my point was qualitative.

The Cato Institute really does lie a lot--as a person with a science background you should know that, and they try to distort reality to always fit their ideological prejudices.

<<BTW Cato has a libertarian viewpoint, not conservative.>>

That's true, but nevertheless his views when he was a liberal would still be quite different from libertarian views. It was so long ago that it is a bit difficult to remember, but I still am pretty sure he strongly favored redistribution of wealth.