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Re: “How silly are the End the Fed signs at Occupy Kansas City?

@ thomas wise - well said, totally agree. the government is the issue, not the Fed. I wish the 'End the Fed' people would wake up and realise this.

@ joe -

"Just think if congress and our government was the bank, we would be making all this interest on our OWN money. There would probably be no such thing as income taxes. All of these government programs would be justified, health care, education would probably all be free."

Please go and do some research and think of the craziness of what you've said and how little sense it makes.

Are you really asserting that if the Fed was fully owned by the government, the government would then pay interest on its own money to itself and this would end the need to pay taxes and make everything free?

C'mon Joe. Think about the ridiculousness of your position.

[As an aside, I actually think 'Reform' the Fed is the correct argument, not 'End' the Fed. The Fed is the most useful tool against recession that the government has. It shouldn't be this hard for me to google and find out what the ownership structure is though and it's damn near impossible... It should be a government entity, even if it is frequently checked and under government scrutiny]

0 likes, 3 dislikes
Posted by drprofessor on 10/11/2011 at 11:31 PM

Re: “How silly are the End the Fed signs at Occupy Kansas City?

@ rick -

let me start by saying that I conceed the two following points to do with the US Fed and its structure:
1. I believe the fed should be fully owned by the US government, rather than have part ownership by private citizens.
2. I believe the fed should be regularly subject to audit.

I don't think the structure of the US Fed is condusive to the best outcome, however, also note that the solution is not to 'End' it because it's functions within an economy actually do more for reducing inflationary pressures and promoting maximum employment than it does for causing hyper inflation. Hyper inflation only becomes an issue when you have excessive money printing, which is something that really only comes on from excessive government spending. If the government spends above its tax incomes, it has to get money from somewhere. It does this by borrowing, which is instigated by the request of the government, not the autonomy of the Fed.

You've asked me to explain all of contemporary economics in a nut shell for you, which is obviously an extremely broad topic so I won't go through it all, but I will quickly discuss what I perceive to be an error in judgement by you guys in your understanding of the Fed's role and inflation.

There is an awful lot of people who call for the ending of the Fed blaming 'printing of money' for inflation. I notice someone mentioned that the fact that prices are not what they were 50 years ago is entirely due to the federal reserve printing money which somehow increased prices of everything. The thing is, the link between money being printed and inflation is never discussed by 'end the fed' arguers, mainly because they don't understand it. They appear to link it in to corporations wanting money so they print more of it, which increases their profit. What they don't seem do discuss is how this pushes the prices of everything else up.

Inflation, is the increase of prices. It is not, nor has it ever been, the increase of the money supply. You can have inflation for example, completely without involving the supply of money. Pick gas for example. If the OPEC nations decide to raise the price of gas or oil, that inflates the price of gas. The money supply has nothing to do with it in this case.

Or, take a more common example, wages. If all workers in all industries demand a 3% wage increase per year as part of their contract, then that 3% cost increase for employing these workers has to be passed on somewhere. Where does it get passed on? In the price of the final goods they are producing. Consider if you will... (example, not real figures)

-The corn price in 1970 is 25c per can.
-The price of labour that goes into producing 100 cans of corn is $15
-Employees who harvest and can the corn feel like they do a good job because they work hard for their money and so they expect a raise every year of 3%.

Based on this, in 1970, the profit on selling 100 cans of corn (if we assume for the purposes of the example that labour is the only input for producing corn), is $10

-the revenue from selling the corn:
(100 cans x 25c each) - $25.

less the cost for producing the corn:

In 1971, the labour cost is going to have gone up by 3%, so labour will cost $15.45 to produce 100 cans of corn.

In 1972, this will have raised another 3%, so 100 cans of corn will now cost $15.91.

Flash forward to 1980, based on 3% increases in wages per year for staff, 100 cans of corn cost $20.15 to produce, in 1990 100 cans of corn cost $27.09 to produce and in 2000, they cost $36.41.

You'll notice that price inflation in the labour is occurred due to workers getting pay increases and the Fed has not appeared in this example.

What's more, you'll also realise looking at this example, that eventually the price of corn goes up so much, that the sale value of 100 cans is actually less than the labour that was used in producing it.

The only remedy for this, is the owner of the corn factory to put up the prices of their cans of corn, which, is price inflation.

If you get any industries where workers expect wage increases, the price of the final goods they produce will go up. What's more, if you have an industry where workers are able to bid for wage increases and an industry where workers are not able to bid for wage increases, the purchasing power of the workers who work in an industry where they can't get wage increases goes down (ie, a worker who works in an industry that didn't get a pay increase has to pay a higher amount in 1971 for a can of corn than they did in 1970, meaning the same can of corn now took more of their wage than it did before, so they can afford fewer cans of corn on the same wage as they could the previous year).

The result of this is that each industry expects a pay increase of the same 3% 'to match inflation'. Therefore, you get inflation in this case not from anything the Fed has done, but from expectation of workers that they will be paid more every year.

That is what causes inflation, not the Fed.

Think about the above example I've given you, and apply it to government spending. Let's say the US government decides it wants to take over the world. To do this, it needs a big army, lots of weapons and vehicles and it needs to employ diplomats to tell other countries.

Initially, it might find recruiting 1 mil soldiers easy using the market wage rate of $7/hr (again wage rate is an example, not intended to be the 'actual' rate).

What if it thinks it needs 20mil soldiers? The easiest way to do it is to wage soldiers pay rates to make it more attractive than other industries to be a solider because you get paid more. In order to compete, other industries that are non government then also have to increase the wages rate they pay so as to keep employees, so they match the government rate. So effectively, the government increases the price of labour when competing for soldiers to work for it.

Then, what if the government orders 50x more machinery for tanks than it has in the past. Obviously, the government has to get people to build these items. So in order to build them, companies need to hire workers. And to find workers, the companies need to pay higher rates than other industries. So they raise wages. And as a result, the government has again caused inflation.

This is what has gone on for the last 50 years in the USA. The government has overspent significantly, each year spending more and more money than it actually gets in tax dollars from its citizens and this has led to it having to use the Fed to borrow.

As the Fed is mandated as a tool of the government, the Fed can not say 'no we won't give the government money' so it obliges.

Your beef is with the government guys, not the Fed. The Fed doesn't cause inflation, the government and our own greed does.

1 like, 1 dislike
Posted by drprofessor on 10/11/2011 at 9:36 PM

Re: “How silly are the End the Fed signs at Occupy Kansas City?

I love how you read through this and none of these people actually understand why the Fed is there in first place, or, rather, try and understand why 'conservatives' think there is a need for it. As far as they are concerned the only reason it exists it to gauge people of their money and for private companies to make more money. I must admit, I don't understand why these people take such a hard line on one side without examining the other. Surely if you felt so passionate about something you would try and understand both points of view? The fact is libertarianism has several flaws in its analysis of modern economics which is why economists look at it as some sort of joke.

1 like, 0 dislikes
Posted by drprofessor on 10/10/2011 at 11:12 PM

Re: “How silly are the End the Fed signs at Occupy Kansas City?

Great article - thank God someone actually points out how stupid this end the Fed argument is. The thing is, most people who propagate for end the Fed don't actually understand what it does, they just know it has something to do with money and inflation. Don't end the Fed you clowns, end goverment wastage that put the country into debt to a point that it can't pay the money back!

0 likes, 3 dislikes
Posted by drprofessor on 10/10/2011 at 10:57 PM

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