On the contrary, besides the fact that only congress has the power to coin money. Which makes the FRB unconstitutional, Dr Paul understands only too well what happens when an institutions has no checks or balances.
I agree that due to the “political business cycle” it might not be a great idea to have congress control our money supply. But at least then you have leadership that is accountable.
The Fed does finance its own operations and doesnt turn a profit technically as it returns money back to the treasury. The huge issue is again, besides the whole being unconstitutional thing is that the shareholders of the fed are the banks of the US and the world. The fed itself does not benefit, but its policies benefits the big banks. Artificially low interest rates create asset booms. Which ALWAYS leads to busts when the fed reduces the availability of credit via its interest rate controls. Without the fed, interest rates on money would be set in the market and be subject only to supply and demand. In a system like that you would not have boom and bust business cycles. Capitol misallocation, ( .com craze,housing,etc…) would simply not happen.
Jimmy, you are 100% correct that expansionary money policy does grow the economy. The issue is that as soon as inflation takes hold and the business cycle slips from boom to bust, you get what we are going though now or worse. I actually have been working on a system for while that would retain the effect of expansionary monetary policy. I will introduce it later
I like gold, but it is a double edged sword. The problem with fiat money that a gold, or whatever precious metal standard solves is that fiat money is only backed by a law saying it is good. Fiat money can, and does very often become valued at its real value. aka, the cost of printing.
Joe, also very true. The real problem would be to stabilize the value over long term using math rather than what a few bankers think should be. While
I lean very closely to the Austrian school, I think Milton Friedman may have been right when he said he would trust a computer more than the fed to handle monetary policy.
Now lets keep in mind here that deflation is actually an appreciation of the dollar.
This means that as the dollar is valued more, prices on your consumption bundle will correspondingly go down. Theoretically, the value of the dollar is the equilibrium where transactional demand = monetary supply. When the economy expands, monetary demand shifts right. Holding Money supply constant you would see an increase in your dollars value.
I agree that having funds available to business is important. It also is important to have your currency actually redeemable in something of value.
It is true that the lending cost would go up. Capitol investment would be slightly more difficult, but due to the stability of the system you would be much more accurately be able to see the future of the economy and the downside risk margin on loans. And also, you have a currency that is fair and a currency that encourages saving. We all know what a prolonged negative savings rate does.
I have been thinking of an alternate system that would keep the value of money stable and eliminate the back door cronyism that the fed enables
If you open up the attachment, look to the top left. This is your standard money market equilibrium.
The graph on the top right shows the effect of an increase in money supply.
MS shifts right from MS0 to MS1. Price goes up from PO to P1. This is inflation, the price level goes up and the value of your dollar goes down.
The graph on the bottom left shows deflation. MS is held constant at MS0
the economys growth is the demand curve. Remember, when the economy grows the transactional demand increases. As the economy grows, demand shifts right from D0 to D1. The result is that the dollars value appreciates and prices go down.
Now in the bottom right you can find initial equilibrium in the money market at MS0 at time T0 and D0 T0. In T1 the economy grows and demand shifts right to D1. Theoretically say this increase is 3%. To maintain equilibrium in the market you would need to increase your money supply. After the GDP increase( the demand increase) is calculated, the money would be injected via the government buying precious metals stocks. You can see this effect in the graph in the bottom right. MS mirrors D and shifts right to MS2 at T2. Of course the fed would be eliminated and the job of the moneys distribution would again be returned to congress who would not be allowed to grow the supply at a faster rate. In the unlikely event a contraction were to take place, the money supply would be left alone. We learned not to contract the money supply during a recession back during the great depression and it would be disastrous to advocate that policy.
Joe and Jimmy Fry, I would really like to grab a few beers with you guys and talk policy in person. Brewpub?
