What is the economic rationale for allowing the Fed to create trillions of dollars out of thin air

[SpunkyTrader]

I'm serious about the MOOC, especially for someone with your interest in the subject. I think you'll find it really worthwhile, even if you took the courses in undergrad. I did my MBA late and my life experience made those courses way more valuable for me even though I was essentially redoing them from undergrad.
It's always easy to find counterexamples to the current low inflation, but even many of those don't hold up to actual scrutiny. Take tuition for example, since we're talking about education and you used it as an example. MOOCs didn't really exist in 2008, now you can take almost any course imaginable from the best professors at the best universities for free! And even if you are a traditional student, tuition is a misleading number. I'll talk about Stanford because I happen to be familiar with it; tuition for undergrads is officially $44,000 and room and board another $13,000. However if your family makes less than $100,000, which is far higher than the nation's median income, you pay no tuition. If they make less than $60,000, still above the national median income, you pay no tuition or room and board. A simplistic calculation of $57,000/year to go to Stanford times X students costs $XXXXX is simply wrong, in fact very very wrong.
We can debate every item you listed and I could provide dozens of counterexamples, but I will leave you with one macro item that you just can't ignore. Since 2008 the price of energy has fallen by 70%. The price of metals is down 40%. These prices get baked into the cost of almost everything we consume, so either the midstream producers are all colluding and making incredible windfall profits without any of us realizing it, or prices in general have gone down or certainly haven't gone up. Keep in mind this is just an intuitive way to look at it in keeping with the intuitive feel of the thread so far. However in the end I'm going to go with the rigorous quantitative measurement of prices that makes up the dozens of price indexes produced by dozens of completely independent public and private entities around the world, absent some specific reasons why every one of them is inaccurate in the same direction.

Eventually it's going to end, and it won't be pretty.

 

[der_kommissar]

The Fed loves to pat itself on the back for boosting asset prices...but who benefits? The baby boomers in large part have been the primary beneficiaries of three successive bubbles in less than a generation (25 years). Couple the equity bubbles with extremely high real estate prices and you really have a demographic crisis...

In many ways the best thing that could happen to these recent college grads and the exorbitant cost to entry in both equity markets and real estate is their inheritance. The only problem is that it will be an impossible task to continue to run this "bubble/bust" economy while balancing inflation/deflation/currency risk going forward...7 years of ZIRP reeks of desperation to boost asset prices at all costs...Where is the future demand for overpriced real estate (foreigners were a big source of demand during the last bubble/bust, but now those economies are tanking and the dollar is too strong)...the upcoming generation has too much debt already...

 

[Zr1Trader]

Avg life of a fiat currency through history is 40 years, we came off the gold standard in 1971. At this point they are just trying to keep the music going for as long as possible before losing complete control. "The free market always gets the final word" even if it takes 40 years or so lol

 

[SpunkyTrader]

The Fed loves to pat itself on the back for boosting asset prices...but who benefits? The baby boomers in large part have been the primary beneficiaries of three successive bubbles in less than a generation (25 years). Couple the equity bubbles with extremely high real estate prices and you really have a demographic crisis...

In many ways the best thing that could happen to these recent college grads and the exorbitant cost to entry in both equity markets and real estate is their inheritance. The only problem is that it will be an impossible task to continue to run this "bubble/bust" economy while balancing inflation/deflation/currency risk going forward...7 years of ZIRP reeks of desperation to boost asset prices at all costs...Where is the future demand for overpriced real estate (foreigners were a big source of demand during the last bubble/bust, but now those economies are tanking and the dollar is too strong)...the upcoming generation has too much debt already...

Bingo, we got screwed out of a raw deal

 

[Sig]

Avg life of a fiat currency through history is 40 years, we came off the gold standard in 1971. At this point they are just trying to keep the music going for as long as possible before losing complete control. "The free market always gets the final word" even if it takes 40 years or so lol

Source, and once you get that, relevance? The average life of an internet company in 1950 was...oh, there were no internet companies and the world's a much different place than it was in 1950, turns out. Don't really get what we're laughing out loud at really either.

 

[panzerman]

The history of economies with fiat currency and a fractional reserve banking system have not generally ended well. A good read about this subject is "The Creature From Jeckyll Island."

 

[Sig]

The history of economies with fiat currency and a fractional reserve banking system have not generally ended well. A good read about this subject is "The Creature From Jeckyll Island."

The western world seems pretty darn successful to me. The U.S. effectively left the gold standard in 1933, meaning it neither stopped the bubble in 1929 nor prevented the worst depression the country ever suffered. Pretty much the entire world is a counter point to the statement "The history of economies with fiat currency and a fractional reserve banking system have not generally ended well."; surely you wouldn't argue that the currencies of the Weimar Republics and Zimbabwes of the world failed because they weren't on the gold standard?
I'd give the same advice to G. Edward Griffin, author of "The Creature From Jeckyll Island" as I gave to an earlier poster, take a macro econ course. The guy has a BA in speech and communications with no economic background and the 50 pages of his book I made it through reflect that. In addition to this book he has written that cancer is a nutritional deficiency that can be cured with amygdalin, HIV doesn't cause AIDS, 9/11 was a inside plot by the U.S. government...he goes on and on. If you're depending on him for your worldview, then your worldview lacks serious rigor.

 

[panzerman]

The western world seems pretty darn successful to me. The U.S. effectively left the gold standard in 1933, meaning it neither stopped the bubble in 1929 nor prevented the worst depression the country ever suffered. Pretty much the entire world is a counter point to the statement "The history of economies with fiat currency and a fractional reserve banking system have not generally ended well."; surely you wouldn't argue that the currencies of the Weimar Republics and Zimbabwes of the world didn't fail because they weren't on the gold standard?
I'd give the same advice to G. Edward Griffin, author of "The Creature From Jeckyll Island" as I gave to an earlier poster, take a macro econ course. The guy has a BA in speech and communications with no economic background and the 50 pages of his book I made it through reflect that. In addition to this book he has written that cancer is a nutritional deficiency that can be cured with amygdalin, HIV doesn't cause AIDS, 9/11 was a inside plot by the U.S. government...he goes on and on. If you're depending on him for your worldview, then your worldview lacks serious rigor.

To paraphrase W. Churchill "capitalism is about the unequal distribution of the wealth, while socialism is about the equal distribution of the misery."

So yes, capitalism is the way to go, but the current system in the US is not going to go on like this indefinitely. It is a house of cards. I'm not as conspiratorial as Griffin, but I do think fee banking and a gold/silver/platinum standard would produce a more stable economy. Cycles would still exist, but have less amplitude.

 

[achilles28]

Inflation is determined by quantity of money and velocity. The consumer, business and financial sector underwent a great deleveraging post crisis which dropped velocity off a cliff. Money was not circulating in the economy. Rather it was used to pay back debt. More loans paid back then made equals shrinking money supply and falling prices on top of it. Fed engaged qe programs to prop asset prices. While saving the banks, they also indirectly buoyed stock markets and real estate which most consumers rely on heavily for investment and retirement.

This goes against every notion of a free market economy and Keynesian economics. The argument was to prevent the next Great Depression. While it's true, a Great Depression would have ensued, nothing can stop that now. Offshoring has decimated American industry and employment. That gaping hole was replaced with private and public sector debt. Fed is just papering over a fundamental problem that was created a long long time ago.

 

[Zr1Trader]

Source, and once you get that, relevance? The average life of an internet company in 1950 was...oh, there were no internet companies and the world's a much different place than it was in 1950, turns out. Don't really get what we're laughing out loud at really either.

There really isn't a whole lot that is new under the sun. Inflation is just a hidden tax, robbing peter to pay paul. Rome debased currency too thousands of years ago. Debasement of currency is corrupt and that is why I am against it. Not sure what internet companies have to do with an inflation discussion. I was laughing in my previous comment because I am in a good mood today. I hope you are too. Have a good evening.