Thursday, January 10, 2013

Murray Rothbard Explains Why the Fed Can Inflate Even When Interest Rates are Climbing

Thus, the "profit or loss" of the Fed is not an issue. The key is that the Fed can always create money.


  1. I understand what the questioner was saying: Because money has to be a commodity, then printing money substitutes is really just creating credit - to be redeemed FOR money, later.

    Note that this view is consistent with the Austrian view that deflation doesn't cause economic crashes.

    When crashes happen, it's the CREDIT supply that's shrinking, not the money supply.

    Were the money supply to shrink in a free market, then the value of the remaining money would end up increasing, but there wouldn't be a crash because nothing had been a malinvestment.

    Rothbard says that people pay for things with dollars, but dollars area really just promises for actual money.

  2. Bob - watch this video again. The questioner is on to something, and if I may, might be closer to the "Wenzelian view" than the Rothbard view. You've staked out your own ground in the Austrian school, and I think the questioner might have been barking up the same tree. I think Rothbard did a little knee-jerk reaction here - if he watched this now he'd have responded differently.

    Credit and money are not the same thing, and in this video Rothbard said they were. He'd kick himself for saying so - they're not and he knows it (as do you).

    Next step - let's find that guy and get him on the Robert Wenzel show. He's worth talking to.

    1. I'm really in agreement with Rothbard here. The questioner is trying to say that interest on Treasury securities limits how much the Fed can print. This is just not true.

    2. Bob - I was totally wrong here...thanks for the response. However, I did find Rothbard's answer a bit unsatisfactory on second viewing, and I think it's partially due to the questioners' conflation of a couple very distinct things in his line of questioning. However, I do think Rothbard made a careless equation between money and credit in this clip, and what I was trying to point out originally is that you make a unique point within the Austian school specifically around this critical distinction.

      Specifically, you introduce the money supply as a "tipping point" in the ABCT whereas Rothbard, Mises, and the prior Austrians do not. In other words, while ACBT in the Mises/Rothbard view identifies credit manipulations and the resulting distortions of the capital structure as a cause of the business cycle, they leave as an open question when this will be exposed. However, in your view -- which I am highly inclined to but think we need a better grounding for -- there is an additional consideration whereby changes in the money supply (as opposed to credit) can trigger the boom/bust portions of the cycle. In other words, credit triggers the distortion of the capital structure, but monetary supply determines whether we keep booming or we bust...generally.

      Am I right? I just didn't like seeing Rothbard be so careless with the distinction between money and credit as he is in this clip, and I think you can and should find objection given the "Wenzelian Addition" to ABCT that you put forth every day. And again, I think you're right, but I'd like to see more theoretical grounding prepared to elucidate your concept.

      And finally, while I think the questioner was a bit confused (he seemed to conflate money creation, money supply, and the debt burden as all one and the same vs distinct issues between the fed and the treasury...) I think from a certain perspective he makes a good point. In a situation where there is massive debt and rising interest rates, additional money creation by the fed is certainly not impossible so long as hyperinflation is not a concern! With massive debt and rising interest rates, I would speculate that increasing the money supply would likely exacerbate the interest rate part of the equation, potentially to the point that increases to the money supply would be outstripped by the increase in the interest rates that it would cause. In other words, hyperinflation. In this regard, I think the questioner was spot on - of COURSE, the fed can increase money supply in a situation of massive debts and rising interest rates, but the value of that money increasingly approaches the derivative (zero) as hyperinflation kicks in. Each new monetary unit begins to have a direct impact on the interest rate, and the value of the currency unit goes down. Perhaps a logarithmic model would describe this?

      Sorry - again, I was wrong with my first comment and you refuted correctly. I just saw an interesting side light in this video that I think highlights where you've carved out your own territory from both Mises and Rothbard, and wanted to call it out. Go ahead and plant your flag in the ground - you're charting new territory in the ABCT every day.


  3. Is it not obvious that the interest burden never gets too high for an entity that can create money(even if you call it credit; which is being redeemed for money almost instantaneously).

    I don't understand this argument about the interest burden being "too high" made by the other the gentleman conflating who is bearing the brunt of interest rates seems like he's making it more complicated than it is.(or I'm a simpleton, which is true at times) :)