Crash reading

Here’s an interesting take on the market. Grim reading but the guy has been right.

Excerpt from the article dated 5/6/04:

By allowing the official overnight federal funds rate to lag well behind the inflation rate, he says, the Federal Reserve made the worst of all possible central bank mistakes. It encouraged as much unproductive speculation in the past year as it did in 1999, when it flooded the world with dollars in anticipation of trouble from the Y2K bug. For this handiwork, he labels the Fed board “worse than the board of Enron” for its obsequious obedience to Chairman Alan Greenspan.

Excerpt from the interview dated 10/23/03:

The way Belkin sees it, we’re “at the end of a liquidity bubble.” Liquidity is analyst-speak for money, particularly dollars that the Federal Reserve prints and pushes into banks in a variety of ways for a variety of economic, political and social purposes. (“When the Fed makes new money, it’s like counterfeiting, only it’s legal,” he quips.) He learned long ago that it made sense to buy into a liquidity bubble while it’s happening, but that you needed to be able to identify its final days and get out a little early.

5 thoughts on “Crash reading”

  1. Geez, Brinker was also castigating Alan today, thinks he should have tightened rates last time.

    And yet he’s still called “the maestro.”

  2. The real problem here is that every move he has made could be justified at the time as reasonable. Expanding the money supply to help ease the Asian currency crisis in 1998 was probably the best thing to do from a global perspective, but the US economy didn’t need the extra liquidity at that time, not even close. The expansion anticipating Y2K also looked reasonable by many at the time, even though now it looks like foolish paranoia. Again, the US economy didn’t need the liquidity, probably exactly the opposite.

    But the real flaw here is in the system that essentially requires that the Fed do this in the first place. The Fed’s mandate from 1913 is to create an “elastic” money supply, expanding and contracting with predictable seasonal fluctuations, anticipating and heading off future liquidity problems, and providing liquidity to the markets to head off panics.

    But humans working with imperfect information, long lag times beyween action and result, imperfect theories, and the limited control mechanisms with which they have to work results in very imperfect policy.

    We expect more of this institution than is reasonable, which is pretty true of all government. What the Fed should do is provide a steady money growth policy ala Milton Friedman and the let the seasonal and other fluctuations be handled by the markets and the price system. I’ll start holding my breath now.

  3. All central banks should have a target of m4=0, all other targets are based on defrauding currency holders.

    You do not expand money, in reality you make it less valuable. Each currency unit should be seen as a share of the economy, expanding the number of shares does not increase the economy, infact defrauding currency holders causes the short termism seen in “modern” (i.e. fraudulent) economies.

    Q. Why does the state fight organised crime so strongly?
    A. It doesn’t like the competition!

  4. In a static world where nothing changes (all things being equal) that’s true. But the economy isn’t static.

    The value of money isn’t decreased by increasing the amount of currency, it is devalued by a rise in prices or the amount of anything you can buy with that dollar. One is the cause, one is the effect. Increasing the money supply at a greater rate than the real economy demands it debases it’s value, not the mere increase itself.

    Of course achieving such a thing is exceedingly difficult on a real time basis, but I think a constant, predictable expansion of the money supply would cetainly provide the best trade off between growth and stability, and the most important thing for most individuals and businesses would be it’s predictability. It’s not perfect by a long shot, but I am pursuaded that it is the best compromise.

    Is that a gold standard with no Federal Reserve? I don’t know. In practice the gold supply (money supply) has generally increased over time due to discovery and the like, but usually unpredictably and very unevenly. So the only way to limit M4 growth to zero would be through active government action and money confiscation or creation, an outcome I don’t think Rothbard intended. In a truely free market system of money the money supply has and will fluctuate, sometimes dramatically, but rarely in response to anything reflected in the growth (or lack thereof) of the real economy.

    I’ve read some Rothbard and I think I follow some of his reasoning, I just don’t buy it.

  5. Money is only as powerful as the hands that touch it; and, the more hands that touch it, the more powerful it becomes.

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