What's the monetarist criticism of the austrian theory of the business cycle?

Quote from FireWalker:


And NO, there is NOTHING SPECIAL about gold. (other than the fact that it can't be printed)
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Durability, ductibility, malleability & scarcity. That is what's so special about gold. There are some basic & logical reasons why it was preferred as a medium of exchange. Silver is a close second, but not as rare and less durable, malleable and ductile.

The real problem with a gold standard is the manipulation of the gold supply which is quite concentrated. Not so for silver, hence the fight of those in power against silver backed money.

Fiat money is fine, as long as the supply of it is held under control. Anyone know of tally sticks? Quite interesting.

Current financial system is the problem. It's a recipe for endless inflation with a big crash at the end. It can even be controlled to cause booms & busts. During the busts, those assets of REAL value, such as farms, factories, real estate, etc. can be grabbed for almost nothing. Oops, I think I just exposed the scheme.
 
My final point is that a global free market economy will never exist as long as we have fiat money because the central banks have a monopoly on the production of money. They have no competition. In a truly free market economy anybody would be able to go into the business of producing money since money would be another commodity.

Do not currencies compete in a way? Late W.Wriston said Forex is much more draconian standard than gold ever was. Isn't development in E.Europe,Russia,
China last 20 years prove of ever increasing competition among nations? I might be naive but every article from any serious source I have read lately suggests more and more the market dictates the Fed(not the other way around) and political class has less and less control over the economy(of course they still have a power to screw up royally) but they wouldn't be able to get away with it like in the past. It seems to me when people discuss this issue they are still stuck in Seventies.I am not expert though.
P.S. There is one serious person who has a problem with gold standard(P. Bernstein POWER OF GOLD)
 
Quote from GoldBug:

My final point is that a global free market economy will never exist as long as we have fiat money because the central banks have a monopoly on the production of money. They have no competition. In a truly free market economy anybody would be able to go into the business of producing money since money would be another commodity.
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Not necessarily true. Fiat money can and has worked. Check your history. Just because a currency is backed by a precious metal, does not mean that it cannot be inflated. There are centuries of history behind this.

You people are stuck on the small hurdle and are far from the big one. Hey I like gold too, I own some cheap gold miners and gold coins but it's not the answer. It's a commodity whose real and fake (futures) supply is heavily manipulated.
 
Quote from Cesko:

Do not currencies compete in a way? Late W.Wriston said Forex is much more draconian standard than gold ever was. Isn't development in E.Europe,Russia,
China last 20 years prove of ever increasing competition among nations? I might be naive but every article from any serious source I have read lately suggests more and more the market dictates the Fed(not the other way around) and political class has less and less control over the economy(of course they still have a power to screw up royally) but they wouldn't be able to get away with it like in the past. It seems to me when people discuss this issue they are still stuck in Seventies.I am not expert though.
P.S. There is one serious person who has a problem with gold standard(P. Bernstein POWER OF GOLD)
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Currencies are controlled by politicians and central bankers and do compete with each other. It's called currency manipulation.

I think you are being extremely naive if you underestimate the control that politicians and central bankers exert over the economy. In a fair free market economy, commercial transactions benefit all parties involved. It's a win win situation. However, in the financial sector of our economy, those who have access to the newly created money by the FED benefit at the expense of those who don't have access - the working poor and lower middle class, the elderly on fixed incomes, etc. This is crony capitalism at best.

The .com stock market bubble, the housing bubble, and now the private equity bubble all have one thing in common; the FED created these bubbles by providing the liquidity.
 
quote from hydroblunt:
Just because a currency is backed by a precious metal, does not mean that it cannot be inflated. There are centuries of history behind this.
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Quite true. When gold coinage was the currency it was debased by alloying it with other metals to make the real supply stretch farther. The Hollywood image of a pirate biting a gold coin is an illustration of a simple test that people of the time used to check a coin's purity, pure gold coins being softer than the ones the king and bankers conspired to make. A gold standard has a purity requirement to ensure that money is actually worth its face value.
 
Quote from Cesko:

My final point is that a global free market economy will never exist as long as we have fiat money because the central banks have a monopoly on the production of money. They have no competition. In a truly free market economy anybody would be able to go into the business of producing money since money would be another commodity.

Do not currencies compete in a way? Late W.Wriston said Forex is much more draconian standard than gold ever was. Isn't development in E.Europe,Russia,
China last 20 years prove of ever increasing competition among nations? I might be naive but every article from any serious source I have read lately suggests more and more the market dictates the Fed(not the other way around) and political class has less and less control over the economy(of course they still have a power to screw up royally) but they wouldn't be able to get away with it like in the past. It seems to me when people discuss this issue they are still stuck in Seventies.I am not expert though.
P.S. There is one serious person who has a problem with gold standard(P. Bernstein POWER OF GOLD)
More...

I have to agree with much of what ur saying. To criticize the current regime is sort of like criticizing democracy, it is easy to point out how the majority can vote for bad policy and often do, but it’s still the best thing we have.

The important thing is to have a low and explicit inflation target. The fed should focus on guarding inflation only, not anything else like managing bubbles or employment. If the fed is data driven to keep inflation low it can’t do much harm, fed officials are only rule following agents.

Any person can’t constantly have better judgment about the economy than the market. So the market should judge, not the fed chairman. Market judgment is based on those who have proved to have good judgment and have voting power according to their past success. Sure the market is sometimes wrong, but not as wrong as one person can be.
 
Quote from Voodoo-King:
Any person can’t constantly have better judgment about the economy than the market. So the market should judge, not the fed chairman. Market judgment is based on those who have proved to have good judgment and have voting power according to their past success.
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Absolutely right.
For anyone interested in a good description of what the Austrian theory is as it relates to inflation and the business cycle the link is to a chapter of a book written by Murray Rothbard. It takes about forty five minutes to read and sums up the theory and the logic behind it. http://www.mises.org/rothbard/newliberty9.asp
 
Quote from GoldBug:

Hi Capablanca:

You are making the assumption that fiat money is superior to a commodity money as a medium of exchange, but I don't see the evidence to support such a conclusion. In the late 1800's, the US economy was expanding and productivity was up yet prices were actually falling. That is because the prices of goods and services in the market place will adjust to whatever the supply of money is.
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Hello, sorry for not having responded sooner. I base my assumption that fiat money is superior as a medium of exchange because it circulates more in the form of credit. Because the central bank can simply snap its fingers and there is automatically more money, capital is more readily available. People who would otherwise be less productive because of less access to capital become more productive. This may contribute to a multiplier effect. For example because capital was available to an inventor he was able to bring his invention to market a year earlier than he otherwise might have and people were able to benefit from the productivity gains that the invention gives them a year earlier. The net gain in such an example is not merely linear but geometric.

With a generally fixed supply of money based on gold, the economy I presume will have to wait for new gold to be mined before it can be lent out. Superficially it will have a more efficent system with money going to those most deserving but others who pose a greater risk will be neglected and less productive and the economy as a whole may in fact perform worse. In general if you believe people if given money will do something good with it, fiat money makes sense. If you believe that people will just waste it then perhaps the fixed money supply regime makes more sense. I would add though that even in the scenario where people are more likely to "waste" money, because of the market mechanism theoretically that money will tend to find its way to people who know how to put it to "good" use. Of course in practice it generally tends to just cause an asset bubble.

If you want a microcosm of the principles involved I would say just look at the stock market. The stock market is very volatile but it is an engine of wealth creation because of the way it allocates capital. Despite the rampant irrationality and the extreme volatility would you argue that the economy would be better off without a stock market and just rely on banks?


The idea that a modern economy simply cannot function without a central bank controlling the money supply is false. How did the US economy function before 1913, the year the FED was created? The biggest problem in the banking system before the creation of the FED was the use of fractional reserve banking. But instead of fixing the problem, the government has exacerbated the problem by the creation of the FED.
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I'm not that clear on my history of that time but as I understand it even without the Fed there were still booms and busts.


My final point is that a global free market economy will never exist as long as we have fiat money because the central banks have a monopoly on the production of money. They have no competition. In a truly free market economy anybody would be able to go into the business of producing money since money would be another commodity.
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I thought gold was its competition? ;) Gold is probably manipulated too however. I have to say that your last comment can be looked at many ways. Doesn't the fact that money can be printed at will "commoditize" money already? As for anyone going into the business of producing money in a way isn't that what investment banks are doing with there creation of all sorts of financial exotica and derivatives? Truth is people can choose to place value in whatever they want. I hope the central banks don't screw things up though. Remember there was a time when cigarettes and a bottle of brandy served as currency after a fashion. I'd really rather we not have to go back to such a time.
 
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