Can Tightening Fight the Collateral Shortage?

Tyler Durden of Zero Hedge claims that any taper in QE will be a response to the collateral shortage — the fact that quantitative easing has stripped an important part of the market’s collateral base for rehypothecation out of the market. With less collateral in the market, there is less of a base for credit creation. The implication here is that quantitative easing is tightening rather than easing credit conditions. The evidence? Breakdown in the Treasuries market resulting in soaring fails-to-deliver and fails-to-receive:


Tyler notes:

Simply put, the main reason the Fed is tapering has nothing to do with the economy and everything to do with the TBAC presentation (rehypothecation and collateral shortages) and that the US is now running smaller deficits!!!

I don’t disagree with this. The ultra-low rate environment (that is still an ultra-low rate environment in spite of the small spike in Treasuries since murmurs of the taper began) on everything from Treasuries to junk bonds is symptomatic of a collateral shortage. Quantitative easing may ease the base money supply (as an anti-deflationary response to the ongoing deflation of the shadow money supply since 2008), but it tightens the supply of collateral.

The evidence on this is clear — expanding government deficits post-2008 did not bridge the gap in securities issuance that the financial crisis and central bank interventions created:


The obvious point, at least to me, is that it seems easier and certainly less Rube Goldberg-esque to fight the collateral shortage by running bigger Federal deficits until private market securities issuance can take its place. Unfortunately quantitative easing itself is something of a Rube Goldberg machine with an extremely convoluted transmission mechanism, and fiscal policy is not part of the Fed’s mandate.

But I am not sure that tightening can fight the collateral shortage at all. The money supply is still shrunken from the pre-crisis peak (much less the pre-crisis trend) even after all the quantitative easing. Yes, many have talked of the Federal Reserve inflating the money supply, but the broadest measures of the money supply are smaller than they were before the quantitative easing even started. This deflation is starting to show up in price trends, with core PCE falling below 1% — its lowest level in history. Simply, without the meagre inflation of the money supply that quantitative easing is providing, steep deflation seems highly likely. I don’t think the Fed can stop.

47 thoughts on “Can Tightening Fight the Collateral Shortage?

  1. In a highly deflationary environment, could not steady or slightly increasing prices be indicative of high inflation, even hyper-inflation?

    • This is a kind of contradiction in terms. Hyperinflation is indicated by soaring, soaring prices and is generally the result of a physical breakdown of the economy — wars, breakdown of production, agriculture, etc.

      Slight price increases in a broadly deflationary environment are just that — slight increases in price in a broadly deflationary environment. What the deflationary environment does mean is that high or hyper inflation are impossible unless something drastically snaps — natural disasters, severe energy shocks, wars, etc.

      • “Hyperinflation is indicated by soaring, soaring prices…” I see your point, but should not price measurement be considered from the standpoint of where they presently are, and where they would be without massive stimulus—if this were possible. If we could measure this we would find that we do have hyperinflation at present, it is just deceptive because it is happening in a highly deflationary “atmosphere”. In the past, inflation generally occurred in a non-deflationary atmosphere, therefore prices were seen to massively rise.

        • Stimuli are one exogenous factor of many. We should define things by actual outcomes, and not try and “unskew polls”.

        • Hyperinflation is -by definition- ever-soaring prices. If prices aren’t soaring, you don’t have hyperinflation.

          Deflation is -by definition- declining prices. If you don’t have declining prices, you don’t have deflation.

          It sounds like in wake of a failure to predict hyperinflation, you are now trying to redefine what hyperinflation is.

  2. The problem is velocity is actually wholly a creature (and an inadequate one at that) of the continual build up of debt, and QE is just another even more inadequate means of re-stoking that palliative during a depression like we find ourselves in presently. Better that we did something actually different and much, much more effective like issuing a citizen’s dividend in perpetuity which solves both the liquidity problem for the individual and the solvency problem for businesses and the economy as a whole.

    This is anathema to the private Banks whose bottom line would be dramatically reduced by a credit creating agency that issued that additional GIFT of money. More monetary Grace, less lending….that is the correct, enlightening and un-hypnotized way forward.

    • Exactly, The major problem with Keynesian style Central Bank stimulus is that you are still ultimately working through a capitalist finance system, and if the problem is rooted in a dysfunction within the capitalist finance system you are going to get a liquidity trap with little of the new money being lent out. Now I certainly believe that QE has done a lot to improve the health of banks and firms by allowing them to de-leverage and make themselves more able to survive in such an environment, but it does very little to actually encourage expansion, because after all, in an environment where deflation expectation is the norm, who would want to be lending and taking risks? Keynes’s solution was government projects to invest in infrastructure and such, and I would support that, but I’m not sure if that would solve the problems of the private sector. Ultimately I see this problem as rooted in flaws of having a system where all capital and all new money creation has to go through the filter of the banking system.

      I would take the extreme position(well its really only extreme in light of Anglo-Saxon business culture) of advocating for alternative, perhaps even socialist forms of money creation with things like interest free lending or a national dividend which worked from the bottom up. Some Silvio Giselle style shit. You don’t have to be a Nobel prize winner to see that giving $1 trillion to the bottom 10% would probably create more inflation and growth than giving $1 trillion to the top 10% where much of it just ends up being sidelined. But of course our culture is so skewed and distorted by our hardline business culture that such suggestions aren’t even on the table and really aren’t being discussed by mainstream thinkers. So we trudge on with the old ways instead.

      • Keynesian style Central Bank stimulus

        Keynes did not advocate central bank stimulus at the zero bound. He advocated government spending; fiscal stimulus! That was his whole point!

        • Perhaps I didn’t phrase that quite right. Yes the main point that Keynes was advocating was government spending, but I don’t think that means that he was opposed to central bank stimulus even if it was ineffective and more needed to be done. Perhaps I am wrong, but I just always pictured it as having fiscal stimulus while simultaneously having an easy money policy, which is basically what most Keynesians today are advocating.

        • Fiscal spending in a deflationary environment is a good idea, as it allow the Government to obtain labour and services at the best rate. The Australian government was trying to roll out a school building program in the middle of a mining boom, and tradesmen ripped them off with exorbitant tenders, which they were awarded. When the government is spending in a boom, it just makes it more costly for everyone. The State should stick to building projects that have National significance, or where private contractors don’t have the size or finance to build. Being a Government, the cost of capital is risk free, so it is much cheaper PROVIDED contractors don’t over bid, and Politicians pay to implement some grandiose policy for political capital.

      • “I see this problem as rooted in . . . a system where . . . all new money creation has to go through the filter of the banking system.”. And “I would advocate . . . socialist forms of money creation.”

        That’s almost the definition of full reserve banking and there are already a large number of people who advocate that (who like me are not necessarily particularly socialist): e.g. Martin Wolf, chief economics correspondent of the Financial Times, Prof Laurence Kotlikoff, Prof Richard Werner, Thomas Mayer, senior advisor of Deutsch Bank. Plus numerous organisations in Europe and elsewhere advocate the idea. If you haven’t come across full reserve, this is a good intro:

        Click to access NEF-Southampton-Positive-Money-ICB-Submission.pdf

        • I have heard of full reserve banking before though I never really thought of it as being socialist or the type of money creation I was talking about, I had always associated full reserve banking with more conservative types and gold standard advocates like Rothbard. When I was talking about socialist money creation I was really envisioning a type of non-profit banking that could exist along side the fractional reserve banking system, perhaps with a central bank or publicly owned bank introducing new money into the economy through interest free lending (basically at a loss) for certain individuals and maybe even charities or welfare program to replace some of the tax funded services of the welfare state and student loan programs and such, while for profit fractional reserve banking could still exist, its just that it won’t be the only source of new money creation.
          I have to admit that I have always been a little skeptical of full reserve banking and have wondered whether consumers really would ever want to have accounts that don’t gain interest, or if abolishing fractional reserve banking would just result in an unhealthy reliance on mortgaged securities and corporate finance instruments. Though the link you gave does lay out a rather convincing case. There are certainly many problems with fractional reserve banking, normally when a corporation goes bankrupt there is a hierarchy of debts to be paid, starting with bonds, then notes, debentures, stocks, etc. However for banks, account holders are never really fit into that equation, so when a bank goes bankrupt it must pay its bond holders and such the money it has, in the hierarchy of debt obligations, and account holders are left out of the equation. And with interbank lending occurring all the time it creates the situation where one big bank failing can bring down the entire system. There are certainly some big problems with such a scheme. While I will admit I’m still skeptical of full reserve banking, I will make sure to look into this more, I didn’t know that there were many individuals in Europe who believed in such a model. Thanks 🙂

        • There is NO reason to have any money lent. If you actually used the money you created through your labor-value, one might think that this would lead to much better decision making as well as less people being considerably less parasitic.

      • See my posts I think 2 years back. I proposed cash handouts to taxpayers, so tax payers could spend on what had utility. Banks would have failed, but they would have been bought out by solvent competitors and bad practices cleaned out.

        Now we have a liquidity trap, a Fed with enough toxic mortgages on it balance sheet to sink it, and consumers expecting deflation.

        • @ impermanence
          “There is NO reason to have any money lent. If you actually used the money you created through your labor-value, one might think that this would lead to much better decision making as well as less people being considerably less parasitic”

          I vehemently disagree with that. How could we possibly have an economy where all spending comes from labor created value that is anywhere near desirable? How will young people who have never worked afford education? How will new ideas be tested out in start up businesses? How will firms obtain capital during hard times? I think that every human has the RIGHT to be lent capital, it allows people to truly have the freedom to be able to achieve their goals and utilize their human capital to the fullest extent. Reducing all capital to labor produced value is horribly repressive and rather naïve of people’s real life situations. Yes our monetary/banking system is dysfunctional, and it does need to be changed, but I don’t think it is economically feasible, legally prudent or morally correct to halt all lending of money.

        • @ Buddy Rojek
          “See my posts I think 2 years back. I proposed cash handouts to taxpayers, so tax payers could spend on what had utility. Banks would have failed, but they would have been bought out by solvent competitors and bad practices cleaned out.”

          I think that’s a scenario that everyone would have preferred, the problem is that the government waited to long to take action on the mortgage crisis and by the time they finally decided to take action, it was the fall 2008 and Bear Stearns just collapsed and was going to bring the global finance system down with it. While giving money to citizens themselves would have been nice, the fact is that such a program would have taken time to complete, time that they really didn’t have because in the meantime banks would be collapsing and people wouldn’t have access to the money they needed for survival. Its the same reason why the Fed couldn’t just buy the toxic assets off the banks then instead of bailing them out, if they had actually acted months earlier they could have been able to pull it off, but they waited too long, which is one fault of a government that believes so strongly in the free market, it will remain in denial right up until it becomes abundantly clear that action needs to be taken. There is also the factor that these banks were international institutions which had accountholders and clients all over the world, and they would be pretty pretty pretty pissed at the US government if they lost their money due to the negligence of US regulatory overseers in failing to stem a crises that really was quite preventable. But the free market culture of Western Governments makes preemptive action in the economy harder to do, businesses will be in denial about their health right up until the end and fight any kind of intervention done before disaster strikes. But preemptively correcting disaster is probably the best way forward. If we wait until the crises is right at our doorstep like we did in 2008 then we are just forced to bail the businesses out and have little options to address the bad practices which led to that crisis in the first place.

          “Now we have a liquidity trap, a Fed with enough toxic mortgages on it balance sheet to sink it, and consumers expecting deflation.”

          Yes and that’s a big problem, although I will say that if there is one place where toxic assets should go, the fed would be the place to put them. If you are to have mass defaults it is better that it occur within a central bank than in the open markets where a debt deflation scenario could be triggered. Kind of like the box bomb squads put over explosives to blow it up safely. I think that the liquidity trap here in the US and also Japan has something to do with median age as well, I’m sure as a CPA you are familiar with the fact that portfolio allocation changes with age, the older you get the more cash and bonds you have and less stock. There is a part of me that thinks that part of the liquidity trap is not just panicked investors, but the result of having a large number of pensioners who are going to be making more conservative investments, in which case we shouldn’t expect to see things change any time soon. Of course this is why fiscal stimulus and investment infrastructure could be a good thing. We could update our power grid and invest in renewable energy in ways that could not only address climate change but bring about cheaper energy for the future.

        • “How could we possibly have an economy where all spending comes from labor created value that is anywhere near desirable?”

          Perhaps in an ideal world, lending money would be an acceptable idea, but in this world of human beings who doing what human beings do, it appears that several thousand years of human history suggests that usury ends up poorly. This is not the first time that a debt crisis has gutted the majority.

          Bringing future income forward at a cost [what debt is] is not only a bad idea, in general, but it creates nearly unlimited opportunities for those with less than honorable intentions to to do what these people have done for…ever!

          If you had zero debt, then commodities/services would have to be priced so people could pay in cash. Imagine that!

        • @impermanence

          “Bringing future income forward at a cost [what debt is] is not only a bad idea, in general, but it creates nearly unlimited opportunities for those with less than honorable intentions to to do what these people have done for…ever!”

          If our economic system was more unstable I would agree, but by and by I think that the booms of debt issuance fueled economies outweigh the busts. I think that there is also something important about investing in the future, if your savings are directly tied to future growth then people have an incentive to be forward looking and create truly valuable investments. In fact I would go as far to say that if people could have savings whose value is not tied to economic stability and future growth (like a full reserve system) you could actually be creating more bad incentives because you are losing economic interdependence which may degrade social cohesion and a desire for long term functional designs.

        • “I think that there is also something important about investing in the future, if your savings are directly tied to future growth then people have an incentive to be forward looking and create truly valuable investments.”

          Mr. Hobbes, there might be something to what you say if indeed a future did exist, but, as mortal men, at best, we are consigned to the near-present. The only “true investment” one can make is with their own time and their own labor. Otherwise, it becomes simply another method of embracing with one hand, and shaking-down with the other.

          A valuable investment? Can you give us an example of a “valuable” investment?

          “In fact I would go as far to say that if people could have savings whose value is not tied to economic stability and future growth (like a full reserve system) you could actually be creating more bad incentives because you are losing economic interdependence which may degrade social cohesion and a desire for long term functional designs.”

          Again, I applaud your idealism, but can you give us an example of this economic interdependence being anything other than one of a million projections from the intellectual geniuses that will do nearly anything to have us jump upon their bandwagon, bang the drum, and follow their grand schemes into the canyons of purgatory [financial and otherwise].

  3. Yes, the Fed can’t stop while “it” cannot be allowed to happen here.

    It would be better stimulating the private economy, by taking private assets as collateral, rather than stimulating the government — which appears to need little encouragement and offers little in the way of trickle-down to the private sector who will ultimately pay the bill.

    • Agreed, and the Government does not always get good value for money spent. Contracts are “loaded” career bureaucrats take the “Safe” option i.e. award the biggest contractors who know they are the only ones that can meet the “spec”

  4. This is a deflationary depression [although it could turn into a hyper-inflationary one if they decided to blow-up the entire monetary system, but this is in nobody’s interests].

    In banking, collateral is THE name of the game, ’cause you know that eventually [in the cycle], the loans are going to go bad. Remember, banking really is not about loaning money and getting/giving interest, instead, it’s about securing other people’s labor-value earned. It’s what all group activity is about.

    If the banking community is having problems with their collateral, then they will do whatever it takes to fix the problem [if possible]. The difficultly at this point is that they have been so successful at enslaving the peeps, that they need to re-set their system and start-over.

    And this is exactly what will happen [sooner or later].

  5. Pingback: Revolution for Victory News Today | Can Tightening Fight the Collateral Shortage?

  6. Re: your recent tweets on gold, I would just like to ask–as the basis for a redeemable commodity money (avoiding the question of whether commodity money is desirable), can you think of anything better than gold?

    (For the record, I’m not a “gold bug.” I don’t endorse gold as an investment, and I don’t believe that gold is the only basis for a Free Banking system. But I also believe that advocacy of a gold-based Free Banking system is not an unfailing sign of lunacy, either. My feeling on gold are summed up in Schuler’s first paragraph here):

    • I find the arguments in the link you provided rather unimpressive. Does Shuler really think that gold standard opponents think the Great Depression is the only example of economic malady caused by a gold standard? What about the multiple depressions of the 19th century? His analysis of Central Banks and monetary policy shows a rather profound ignorance of economic history. Before Central Banks most countries had treasuries running the roles that Central Banks do today, for centuries treasuries were “activist” or “militarized”, debasing currency during wars and acting to stabilize markets.

      The arguments against gold standards and silver standards are based on the fact that during economic downturns, demand for precious metals violently goes up, which under ANY kind of gold standard is going to cause deflationary trends and all the drama they bring along with a credit crunch which worsens business cycles and can lead to depressions. Central Banks really have very little to do with this because what causes this is an economic trait inherent to gold itself. The gold standard is thought to be a contributing factor to much of the depressions throughout modern history, many of which were by many standards more severe than the great depression of the 1930s. The only reason why gold standards functioned at all was because for centuries price fixing was easier because markets weren’t developed enough(not enough buyers and sellers) to reach price stable price equilibriums on their own and so governments and local authorities often played a role in setting market clearing prices, and since markets moved slower they could react to changes in market conditions more easily. However, by the turn of the century with advanced modern economies and futures markets, commodities simply became unfeasible to have as currencies, the troubles of the interwar period had more to do with institutions stuck in old ways unable to accept new realities(like the fact that the gold standard was finished) than it does for any kind of problem with acitivist banks fucking up the gold standard. The problem with gold as currency is a problem inherent to the metal itself which no model can feasibly address.

      • I agree with your comment above that capital lending s needed, and interest should be charged. I disagree that the government could not have pumped the cash into the economy. They have a system in place that can immediately inject funds as needed. The tax system. Most people get cheque refunds or direct deposit refunds. The Tax offices have all the relevant data.

        A collapse of the Banking system would have freezed up Letters of Credit and trade, but it would not have been catastrophic. Most people can eat locally and any delays in exports, imports would not have been an issue.

        Having worked in Banks and seen the crap that goes on, Management had to be punished for taking on cowboy practices to boost short term profits.

        • ” disagree that the government could not have pumped the cash into the economy. They have a system in place that can immediately inject funds as needed. The tax system. Most people get cheque refunds or direct deposit refunds. The Tax offices have all the relevant data.”

          That may very well be, but I think that given the situation that the Fed and Treasury Dept. were in during the fall of 2008 it may have seemed to risky. Keep in mind that the crisis started in the US banking industry, but given the interconnections of the global finance system virtually every bank on earth could have been affected. That’s basically what happened in 1929, the US let the bottom fall out, and it slowly weakened everywhere else, the European banks didn’t go under until a year or two later, the debt deflation slowly grew like a cancer. My guess is that while the US could have done things to help the American people, if we let our big banks go down we would be losing trillions for everyone else, and China and Russia and Europe would have been pretty pissed at us, which would not make for good global policy. I would not put it past China to make us payback in a big way, they had huge holdings in American banks. So my basic theory is that the US chose the bailout really because it was the quickest way to get China and Europe off their back, not because they thought it was the fairest or the best way to deal with the financial crisis.

          “A collapse of the Banking system would have freezed up Letters of Credit and trade, but it would not have been catastrophic. Most people can eat locally and any delays in exports, imports would not have been an issue.”

          That may have been true, but as I said earlier, there were way too many unknown variables at play. It may have not been catastrophic, but then again it may have been catastrophic. But really what could have made it catastrophic was the social repercussions, and those are a big time unknown variable. Keep in mind that the biggest consequence of the Great Depression was not just Dust Bowls and Hobos, it was Germany having a revolution where blood thirsty radicals took over and launched the deadliest war in human history. There’s no way to fit something like that into an economic calculation, but something like depressions and radical violent revolutions is not out of the question in these kinds of events. That’s where the art of leadership came in, my guess is that the US bailed out the banks not just because of their own economy, but because of the potential social and political repercussions. Unlike the 30s we have nukes now, we really can’t afford another Hitler or Mao.

          “Having worked in Banks and seen the crap that goes on, Management had to be punished for taking on cowboy practices to boost short term profits.”

          That of course is the biggest shame of all, the banks got away with murder. I think ultimately though to prevent this is figure out a way to make banks more accountable. One way is through account owners rights. Normally when a corporation goes bankrupt the government isn’t going to have to intervene, they go to bankruptcy court and their assets are liquidated to pay off creditors, bondholders and shareholders of what is left. With banks its the same thing, except the account holders are completely left out of the equation and left with nothing, people’s entire life savings can literally vanish into the air and they have no recourse. Perhaps we should create legislation with changes the status of account holders so that they have legally defined rights and fit into the debt hierarchy, that way if a bank goes under they get to be waiting first in line and get their money back instead of just getting screwed. And in light of all the talk of gold standards, full reserve banking and socialist finance to deal with the flaws of the banking industry, the idea of simply defining account holder rights may be the most politically feasible one of all.

      • On your arguments regarding gold, I notice recessions depression were severe, but shorter in duration during gold standard times, and economic growth and innovation explosive. As human knowledge grows, would’t innovation and growth be more explosive, if we consider history as a guide? It seems we stagnated after WW2.

        Adam Smith notes that a labourer in his time could support a family WITHOUT a wife working, and afford his daily needs with some luxuries(Disregard superfluous novelties of the rich). England at the time being the most powerful nation. If we assume USA the most powerful nation, or even China for that matter, this is unheard of today.

        • I wouldn’t necessarily say that we stagnated after WW2, in terms of technology, things like IT sector and health care have exploded in innovation. Just look at the pharmaceutical markets, in the late 40s we were performing lobotomies and having massive psych wards, people were still dying of “old age”. Now we have a cornucopia of drugs and advanced procedures for virtually all kinds of illnesses and the innovation is only increasing exponentially (even in the past 5-10 years radical new cancer treatments have arisen which are changing medicine). And as for things like computers, well here we are having a conversation on opposite parts of the world, something which would have been far more difficult 25 years ago.

          However, in terms of heavy industry, its true that not much has changed since WW2, although there are still many innovations like fracking for example that pop up, just probably not at the rate that we saw at the turn of the century. But I am not really sure if this has much to do with monetary policy at all or rather just rate of technological development. Humanity seems to go through phases where new technological can create explosions of innovation that then seem to fill in all the gaps and stagnate for a while before a new revolution comes along. At the turn of the century it was mechanization and the advent of engines which brought about sweeping changes across our lives, but after WW2 we had pretty much played out all of the things we could do with that: jet engines, turbines, motors in assembly lines, cars, etc. The most we’ve done since then has been to tweak that.

          However, just as WW2 was winding down new technologies in computation were arising as well as chemistry, which pretty much helped to trigger the revolutions we have seen in those areas. Lack of new innovation doesn’t necessarily mean stagnation, sometimes we just have technology that works. Look at things like fishing nets pulleys, they still hold value thousands of years later because living here in the physical universe there really aren’t any mechanical designs that do the job better. Shit, humans still rely on combustion for the majority of their energy needs, and we’ve had that since Homo Erectus (though, with climate change becoming an issue that might change in the next century). So I disagree that we have been technologically stagnant the past 70 years, and I also disagree that monetary, and perhaps economic policy (of course within reason, really bad econ policy will retard development) really has major effects on those things. I think its just that since WW2 the new developments have been in specific things that haven’t revolutionized our lifestyles in the way that mechanization did the first half of the 20th century (though one can make the argument that personal computers have radically altered our lifestyles).

          Anyways, back to gold, its true that many of the crises in the gold standard years were volatile but short lived, however there were long lasting depressions in the 19th century that did last just as long as the great depression (like in the 1840s and in the 1870s, appropriately named the “long depression”). So the argument that gold standard depressions are somehow shorter doesn’t entirely add up because 5+ year long depressions did occur under the gold standard as well as short lived crises. One of the insights of Keynes which I believe is that there are different kinds of economic recessions, your standard business cycle recessions and then truly great, liquidity trap depressions that last longer. The business cycle still occurred after we got off gold standards, and in fact I would argue that the many recessions we saw after WW2 occurred with the same regularity as the crises we saw pre WW2, the only difference is that post WW2 they were simply short lived recessions while as pre WW2 they turned into all out banking crises, even if they were short lived. So I still believe that the move away from gold has been a good thing, business cycles really aren’t any more drawn out than they were under a gold standard, the recessions seen in the 50s, 60s, 70s, 80s, not really in the 90s but certainly in the dot com bubble only lasted a short period of time and they didn’t involve bank runs. The historical data doesn’t seem to support the hypothesis that gold standard crises were intense but short and fiat business cycles were drawn out, the business cycle has more or less stayed the same, its just that post gold standard it didn’t have the same drama in the finance sector. And in this day and age when more people are dependent on markets than ever before one could say that banking crises would be a bigger deal today than they were in the late 1800s and early 1900s when many people in the developed world still got a good amount of their food and necessities from farming and hunting.

          Finally, to touch on Adam Smith, I think it should be noted that one reason why 1 man supporting a family is unheard of today in the richest nations may have something to do with women in the workplace and its effect on employment. Sexual equality and social movements created opportunities for women and minorities which let them join the work force in greater numbers, which would create a greater amount of total workers in the real economy. In pure terms of employment, having half the population stay at home instead of going to work (which was the case in Smith’s time) would probably create a smaller worker to employer ratio, meaning that labor could bring in more value as compared to capital. In the modern world where nearly all women are working we have effectively doubled the labor force, and when that is taken into account, the fact that employers have been able to absorb that without causing massive levels of unemployment is quite impressive. Our economy has grown enough that it can employ a society that has 50% higher employment as compared to older times, only great growth and innovation can accommodate such a radical shift which really happened in a short amount of time. Much of the advancement of working women and the end of the “housewife” was a post war development. Though it does bear mentioning that unemployment levels are higher today than they were in the 1950s, still, they would be much higher if employers were not expanding and offering more positions. In fact, if the tradition of the stay at home wife was revived we could expect to see lower unemployment and higher wages as you would be taking a huge chunk out of the labor workforce and there would be a surplus of positions available, though I think at this point that is probably impossible for cultural reasons nor would it really be socially desirable. But once again, I am not sure how much monetary policy has to do with any of that, a lot of this is technology and culture facilitating it. That being said I think the switch to fiat has helped more than it has hurt, it has made business cycles more tame in terms of their effect on the financial system and there really isn’t much evidence that it draws them out any longer than seen in gold or that it has stifled economic progress. I personally believe that in terms of meta-trends like the industrial revolution radical new technological development plays a bigger role than pure economic policy. There is no doubt that our global monetary situation is quite dysfunctional, and we will probably see another Bretton Woods like monetary restructuring before 2030 when public debts become too unwieldy, but I don’t think that gold is the answer.

      • [ Disclaimer: please keep in mind that I am not advocating a return to a gold-based commodity money; my more immediate preferred policy would be akin to Scott Sumner’s NGDP targeting regime ]

        “What about the multiple depressions of the 19th century? “

        Which 19th century depressions are you referring to? If you mean those in the United States, the primary causes were likely restrictive banking regulations, not the gold standard (we can infer this by looking at Canada’s Free Banking system, based on privately issued banknotes redeemable in gold; Canada largely avoided these financial panics). The bad US regulations in question were: 1) Prohibitions on bank branching; 2) Requirements that, prior to issuing banknotes, banks had to first buy a slightly larger amount of state (and after the Civil War, fed. govt) debt (ex: to issue $90 of currency, a bank first had to buy $100 worth of state bonds).

        Restrictions on branching caused the asset side of banks (loans) to be overexposed to regional economic fluctuations. It also caused banks in the interior to be totally reliant on NY “correspondent banks” for access to the NY money market. Naturally, this created more fragility in the system (esp. during panics).

        The limitation on issuing currency also was a direct cause of the currency shortages of the 19th century. Banks should have been allowed to lower their reserve ratios and issue currency w/o restriction in times of exceptionally high demand for banknotes (such as during harvest season, when workers needed to be paid). The govt debt purchase requirement needlessly tied currency issuance to the govt bond market (and also caused banks to accumulate too many state bonds, which often later turned into junk).

        For further information, I highly recommend this lecture by George Selgin, particularly the first 20 minutes:

        • Bad banking policies certainly didn’t help, but generally regulations tend to decrease efficiency and cause stagnation. I don’t see how regulations on banks can be seen as the cause for reckless over-lending and dramatic collapse, because banks were still being run by at least semi-rational actors who were privy to enough information to make choices, and those restrictions on banks were certainly information on the rules they were working within. Now I suppose one could argue that the restrictions on banks limited their options on how to mitigate bad market trends and may have further caused collapse, but you could also just as easily say that it was volatility in the currency which caused deflationary spikes which caused good debt to become bad debt and thus lenders can’t get their money back and they go insolvent. I think it may have also had something to do with the fixed exchange rates placed on gold and silver which made people able to exchange money for gold at below market value during downturns which only further worsened deflationary trends.

      • “for centuries treasuries were “activist” or “militarized”, debasing currency during wars and acting to stabilize markets.”

        The first part re: debasing (and not just for military spending!) was certainly true. However the second goal–“to stabilize markets”–did not seem to be true (could you give some historical examples prior to Bagehot’s recommendations)? Even central banks (namely the Bank of England) only gradually came to recognize their “stabilizing” role; for many centuries, the BoE vehemently denied that its actions had any effect whatsoever on overall credit conditions, let alone the real economy.

        • Every assumption in economics depends upon the velocity theory of money and its re-circulation. However, it is just another piece of unexamined economic orthodoxy, and will not hold up upon examination.

          Velocity theory is very curiously anti-historical. It supposedly creates all of this purchasing power continually and yet people are chronically in a state of increasing austerity so neither individuals nor businesses have enough. As I say, curious.
          The truth is there is a continual build up of debt (this is enforced by the actual scarcity of incomes to prices because without that continual borrowing the economy would implode straight on). This causes continual recessions and eventually results in a debt deflationary depression like we have now.

          The effect that is erroneously attributed to Velocity theory, that is an increase in purchasing power, is actually entirely the result of this continual injection of loans and government spending into the economy, and yet that continual borrowing is completely problematic. Velocity theory fallaciously abstracts out the context within which money flows through the economy, namely businesses whose TOTAL costs must always all be paid…or they go out of business.

        • @John S. You do make an important point. My answer would be that we didn’t really see a need for government treasuries to act very often to protect the economy before we had modern business cycles. And modern business cycles really didn’t emerge until we had larger monetary market based economies as opposed to more barter based economies. And those nations which had monetary market economies which were large enough for the business cycle to be meaningful tended to be advanced ones that already had central banks. In ancient times and the medieval era when most private trade was done with barter, there was very little a treasury could do to affect that from pure monetary policy alone. However that doesn’t mean that governments were actively involved in trying to promote and facilitate trade in their barter based economies. One such example that came to mind was the medieval laws regarding market towns, which were very much activist policies trying to create centers of trade and markets for farmers to sell their goods. But to say that we didn’t have public powers fiddling with the economy until the central banks of the 20th century would be completely wrong in light of historical evidence.

      • Fortunately, you really don’t have to be all that knowledgeable when it comes to banking if you understand one fundamental principle [of systems], which is, the more complex a system becomes, the further it moves from its [purported] truth.

        Since money is the abstraction of labor-value and makes banking possible, it is this abstraction, and then its further abstraction into credit that completely obscures the entire process making it possible to steal the vast majority of labor-value earned, resulting in the horrendous disparity of income witnessed over the past several centuries [particularly accruing the financial parasites].

        Although a gold standard is certainly better than fiat [especially in balancing trade], it would be like saying that you’re better off with a malignancy affecting 50% of your lymph nodes as opposed to 60%, which is no doubt the case, but sort of besides the point.

      • Re your post thehobbesian | June 29, 2013 at 9:16 pm

        I did not think about the innvation in chemistry and health. My interest is mechanical, and thanks for reminding me of the other innovations.

        Regarding the rest of the post, an impressive piece. Thanks.

        Regarding women in the workforce, My sister is a stay at home mum, because her husband can afford to. My little nephews are basically home schooled from birth. It is interesting to see the effect of individual personality, despite an equal amount of time, lessons and stimuli. I wonder what this effect has on childhood development and innovation. Perhaps the industrial revolution was the result of advanced learning from dedicated “nannying”. I know I had the luxury I reading from a young age, due to a Grandmother who loved to read to me.

        I am reading Edmund Burke’s reflection on the Revolution in France, and he is criticising Fiat Money, introduced by the Revolutionary Government, as opposed to the traditional coin. When we look at France Today, even Pre WW2, it was/is a backwater. It has had the longest experience with Fiat money of all advanced nations. Doesn’t a gold standard constrain budget deficits, thereby making Government leaner and more efficient? Doesn’t this reduced taxation make the private sector more competitive in the international arena? I am not a Gold Bug, nor a Gold Standard advocate, I just know that a Government supported by Fiat money especially the US Government, is not an efficient Government.

        • My Mother was stay-at-home for most of my childhood, and I do think that it brings some benefits. And perhaps we have lost something valuable in women joining the workforce, but I still don’t really believe that this trend is going to be reversed in the Western World.

          It is true that a gold standard could in theory constrain government coffers, and indeed much of the arguments for the gold standard come from the idea that it can act as a check on the government. However, I still have my doubts, the basic rule of life is that the government always wins, and even under a gold standard they could still be able to do what they want. For example, forced conscription was a popular method in the olden days, and it provided government with a way to get labor and thus engage in activity without having to raise monetary funds, they can compel action through pure fiat. And in that case you are still taking labor out of the market and all the opportunity cost concerns that come with it. It is true that fiat money has enabled government to be more inefficient as they can simply inflate over time to reduce real debts. I’m not sure however if fiat enables inefficient government, or if it just makes inefficient government less harmful to the rest of society. Certainly the governments of the past 10,000 years all weighed down on society and on markets, and though we still have inefficient, overbearing governments to this day, there is no doubt that private economic activity has flourished more than what it has at any time in history.

  7. Wait until Central Banks sell the “barbarous relic”, then purchase physical. I don’t see that yet (Announced anyway) ETFs have artificially pumped and dumped gold.
    We are headed for Deflation (Inflation is not possible due to global supply excess) The reality is we have too much of everything. Even in poorest Africa, they can get TV’s for nothing.

    The real supply constrain is bitumen, for our roads. You can’t make bitumen from Nat Gas. We’ll have Nat Gas powered vehicles (See Westport vehicle systems) and roads like Siberia. Russian vehicles may eventually get a market LOL.

    Go long bitumen, it easily stores and WILL hold long term value!

  8. Early comment on your upcoming Austrian econ piece: the best place to start looking is the present, not the past. Modern Austrians can clearly be divided into two groups–The Mises Institute (aka Auburn) and those affiliated with George Mason University (GMU). The Menger/Mises decoupling is not appropriate, b/c both groups retain the strong imprint of both (just ask Boettke, Horwitz, White, or Selgin on the GMU side how much they respect Mises).

    E.g. Larry White on Human Action:
    (Many similar links and clips on Mises by GMU Austrians exist).

    The key difference is Rothbard. The LvMI reveres Rothbard as a god, while his reputation is far less sacrosanct among GMU Austrians.

    Re: gold standard–I think it is best to characterize the GMU side’s position as pro-Free Banking, not pro-gold per se. It is the govt’s monopoly over the money supply (and resultant undue influence over interest rates and overall credit conditions) which GMU Austrians see as harmful. Larry White is the biggest advocate of gold among Free Bankers, but if you look at his body of work, he’s written a ton about Free Banking, but much less on gold. He would certainly classify himself as a Free Banking advocate more than a gold standard advocate (and certainly not as an advocate of a centrally managed “gold standard”; there’s a podcast of him discussing this issue specifically with Dick Timberlake out there, can’t find it now).

    • On Twitter you wrote: “The last time I did that George Selgin came on my blog and went wild about how he is not an Austrian.”

      This really isn’t a fair characterization. He objected to your description of himself as someone who favors a central bank. He attacked internet Austrians, but rest assured, Selgin has plenty of respect for serious academics who are self-described Austrians (Horwitz, Boettke, White, Mario Rizzo.

      More than anything, Selgin dropped the “Austrian” label b/c he doesn’t enjoy “school based economics,” just “good economics” (a rather courageous move, since he has had to deal with charges of being an “Austrian sellout” for his entire career). This is very much in line with your own views. Here is a link to better clarify Selgin’s stance on the Austrian label:

    • Another key difference between Auburn and GMU: fractional-reserve banking. Nearly everyone on the Auburn side says it’s fraud, while not a single one on the GMU side (that I’m aware of) agrees.

    • All Economic arguments must consider the impact democratic votes and party politics has on policy choice. I doubt any one Economist gets to implement their theories without some interference from the Political reality. Maybe Ben Bernanke is the only one to be given free reign, and I feel that has been a failure. The following article has compelling arguments against Monetary Policy.

      I personally feel that Economic policy should be limited to explaining to politicians that they can’t manipulate the economy, only rebalance spending for Nation Building goals WHEN the economy is in a situation to compete with the private sector. For example, you don’t build bridges,and compete with another sector experiencing as boom e.g. mining, and compete for skilled workers. And because humans are NOT rational, return/raise their taxes in the form of a cash payment/deduction when they irrationally curtail/raise spending e.g. stock market collapse or boom.

      But Politicians love pork barreling. So Economist theoretical models don’t reflect political reality. Only Keynesians have found a theory that has the ear of Politicians.

      The reality is economies, world wide are being socialised and regulated in increasing amounts. Keynesian and Modern Monetary Theory fits this natural progression.

      I know that before government intervention recession were shorter and busts short lived, but it will take along time before voters are savvy enough. In the meantime everybody votes for the politician who spends

  9. If you are going to have money, then you must understand that the mixing of such with human nature results in a highly volatile solution.

    So, what you have is all these different schools of thought suggesting that my poison is less toxic than is yours, but all agree that the fundamental idea of abstracting labor-value into money is sound.

    In this way, the common man can contain offering his hard earned labor-value to the classes above without ever [really] understanding the true nature of his thief.

    In order to be much more free, people need to be able to control their own labor-value. This should not be such a difficult concept to wrap ones head around. But, instead of seeing the truth, people [instead] can not refrain from indulging in the fantasy that they can get something for nothing, i.e., stealing it from those who produce wealth, and the ruse continues…

    Even amongst those who seem as if they are search for answers [such as people on this discussion board], nobody can let go of the notion that to send ones money somewhere [an “investment”] and getting more money back is nothing more than fascist thievery, albeit dressed nicely in corporate garb of sophistry, out-right lying, and deceit, served like pheasant under glass to the masses desiring to join their heroes in the promised land of gated communities, long German sedans, and all others material attributes one witnesses on the way to Hell.

    • It is true, individual selfishness is a human trait, and everybody is guilty of it. Some have more sophisticated ways than others, and some employ agents (Unions, Financial Planners) to do their dirty work.

      • BR, I believe that many people become quite confused as they mistake natural self-interest [survival instinct] for selfishness. It is the power of the group that catalyses this tendency, altering their self-interest [manifesting as selfishness].

        Look at the people who reach high places either in government/corporations/religion. These are severely unbalanced people [by definition, although there are extremely rare exceptions] who use the power of their associated institution for their own enrichment [while the masses cheer on their heroes and their own impoverishment].

        The larger the group, the more this affects the system [the population]. This is why economy-of-scale, while producing cheap[er] commodities on the one hand, ends up producing a population with decreasing incomes as well as an elite with skyrocketing incomes.

        Modern economics should not be about genuflecting to this false idol [economy-of-scale], but instead, in seeking a balance between individual empowerment and meeting the absolute minimum socially necessary services.

        Otherwise, you end up with systems cultivated the shit [lying, deceit, fraud, etc.] mixed into the mulch, with rotten fruit produced at harvest [bloated government, cartels, and all the rest].

  10. Everything in economic theory depends on whether or not C. H. Douglas’s A + B theorem and my P = In < Pr are true. All theory will need to be rethought, many variables will have to be tossed out and/or adjusted for accuracy and not only will neo-classical equilibrium go out but also their fixed idea that markets are natural in and of themselves. Even a Minsky type financial instability will have to acknowledge that markets will not clear without CONTINUOUS SPECIFIC overt actions and are in fact not just occasionally ponzi but are radically and fundamentally unstable.

    If the act of production itself produces an effect which destabilizes the economy….then uncorrected the wheels will fall off the whole shebang, there's a gigantic bumble bee with a deadly stinger in the ointment of "free" market economic theory and everyone who didn't look closely enough at both orthodox theory and the empirical evidence lying right beneath their noses in the books of every business where the evidence for this instability hides in plain sight…has egg on their face and owes everyone from the tycoon to the beaten down lower middle class worker a huge apology for the almost century of onerous existence they have been forced to endure instead of the truly free existence they could have prospered in both economically and psychologically since Douglas first proposed his Social Credit policies.

    Think about it. If everyone NEEDED AND REQUIRED a decent pension for life in addition to the job they had…IN ORDER FOR THE ECONOMY TO FUNCTION CORRECTLY ON A CONTINUING BASIS….how much different would personal indebtedness statistics be, how much different would the equity percentages on personal property be, how much more easily would paying off your debts be? How much less dominating would Banks be to both individuals and to governments if their consumer markets were fundamentally eliminated? How much smaller could governments be if they could eliminate the bureaucracies for welfare, unemployment and eventually even Social Security? And how much more purchasing power would individuals have if they didn't have to pay taxes for such?

    If Re-distributive taxation is actually necessary only so that governments and financial systems could shackle the populace despite an almost miraculous technological rise in productivity and an increasing prospect for same, and Distributive ones such as Social Credit has always asserted, and MMT is beginning to cognite on, are more efficient and free…why persist in such enslavement?

    If relative personal prosperity and self determined choice about employment has been possible for a century instead of largely onerous, mostly boring, personally unrewarding, very time consuming and last but not least actually unnecessary work was compelled….how much righteous indignation could the individuals of the world be justified in? ….and how much redress with monetary Grace would enable them to create a symmetrical psychological Grace so that such potentially destructive vehemence could be avoided? Probably only a fair, adequate and reasonable amount that accurately reflected the true wealth of the nation would be my best guess. Most people, even aggrieved, are not vengeful. It is a measure of the basic goodness of Man, who despite being flawed, overwhelmingly chooses the moderate course, the golden mean instead of the bloody excess.

    If all of this was possible, and all of what instead occurred can be put at the feet of excessive orthodoxy, failure to actually look at continuously present data and self interested palliation of the problem instead of actual solutions either in the pursuit of career security or the continued domination of economic and financial systems…how strongly must we insist it be changed for ourselves and our posterity, how focused must be our determination to transform this system and how will we communicate “ the fierce urgency of now!” to political and financial authorities that have it within their power to make these changes?

  11. Pingback: Banking, collateral shortage and the rehypothecation link (advanced) | Moningtonomics

Leave a Reply to thehobbesian Cancel reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s