Wednesday, April 27, 2016

Banksta’ Rap


Sometimes you don’t even have to think about an idea to know just how bad an idea can be . . . like doing a blog posting about the financial system titled “Banksta’ Rap,” writing it like a rap piece, and thinking it wouldn’t make us look like complete idiots.  It’s a really good idea to understand a medium — or anything else — before using it.
Now you know what H.D. Macleod looks like.
Take, for instance, the financial system.  Very few people (especially those in power) really understand money and credit, or the private property on which money and credit is based.  (Yes, “is based.”  Money and credit, as Henry Dunning Macleod pointed out, are simply two different aspects of the same thing.)
Some people, however, know enough to ask meaningful questions, such as “Does anyone have any thoughts on why we haven’t seen massive hyperinflation despite all the quantitative easing?”
First, strictly speaking, hyperinflation is when the price level rises faster than the money supply increases, e.g., in Post-WWI Germany and Austria-Hungary. High inflation is not (necessarily) hyperinflation, although high inflation can easily lead to hyperinflation when the money supply is backed predominantly with government debt instead of private sector hard assets, and people lose confidence in the government that issued the debt.
That being said, the reason that we’re not seeing high rates of inflation in consumer goods is that most of the money from “quantitative easing” has been funneled into the stock market, driving up prices there.  In a few other areas, such as education, the increase in demand is due to the fixed belief that “a good education” guarantees you a good job.  This has dramatically increased the cost of education . . . at a time when increasing numbers of jobs are eliminated by technology or shifting them to lower wage areas.
Most of the inflationary increase in the money supply, however, has fueled speculation. This is because commercial banks, which since the repeal of Glass-Steagal can invest in things other than commercial loans and their own shares, prefer to make massive amounts of money from stock market speculation, rather than make business loans at near zero interest. This is why commercial and investment banking were separated following the Crash of 1929.
Glib, although not very useful.
Simply ranting about “the banksters” isn’t going to solve the problem. Shifting from the currency principle to the banking principle, and instituting proper internal controls in combination with a Capital Homesteading program would go a long way toward fixing the problem, if not eliminating it altogether.
Right after we answered this, someone asked the question, “Doesn’t [the lack of inflation] have to do with the dollar being the reserve currency, which keeps inflation off shore where other countries buy our debt and trade in US dollar?”
Good point, but that does not directly affect inflation.  Strictly speaking, the reserve currency’s role is to be available to convert or redeem all other forms of money.
When the demand for the reserve currency is high (i.e., people prefer to hold the reserve currency instead of another form of money) this can cause deflation — if the reserve currency is “inelastic,” i.e., does not increase and decrease directly with the changes in demand for the currency.  Currency inelasticity can also cause inflation if people “dump” the reserve currency, thereby increasing the supply of it on the market.
All other things being equal, however, since what is happening in a conversion or redemption into the reserve currency is simply changing the form of money, there is no overall change in the money supply, and thus no inflation or deflation. Inflation or deflation in such cases is due to other factors, e.g., government increasing the amount of reserve currency backed by its own debt, as is done in “quantitative easing.”
#30#

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