House passes Audit the Fed bill.

[Ⓐnarchy in the ☭☭☭P!]

If the Fed really is secretly monetizing debt, why would we be better off knowing? Wouldn't that just cause inflation?

So you would rather remain ignorant and have everything blow up in our faces much, much harder?

I would rather remain ignorant in the hope that it doesn't blow up at all. And why should it blow up? It's not like we have an inflation problem at the moment--and in this case the long run doesn't matter because the Fed can just change its policy if this changes--so why mess with it? If the Fed is, we're just getting a free stimulus. I know this sounds backwards and wrong to a lot of people, but neither money nor gold have an objective value; both are worth whatever people think they're worth. If the Fed's printing too much money and pumping it into the economy, as long as no one knows, who cares? But if we all find out, then the everyone will start devaluing our currency much more. And maybe the Fed really is just adding 2% each year like they're supposed it. But if they're not I for one don't want us to know it.

This isn't an ideological view. I'm just worried we're going to create an inflationary economic mess for no reason.

Some libertarians believe there's, uh, magical secret hyperinflation going on, we just haven't noticed yet.

It's not that it is happening-it's that it has happened, and could happen.

How is it even possible to have hyperinflation, or inflation at all, happen without anyone knowing? Inflation is by definition a general rise in price levels of goods and services, which are known publically. It's not like inflation is caused only by the amount of currency the market; it's also possible that additional currency will result in greater investment in productive goods and services in the economy. That is the entire point of lowering interest rates: to get more people to borrow money and invest it in the economy.

The economy doesn't work like conservative forces or non-nuclear mass calculations; it's not a zero-sum game.

But money is a placeholder for value, and creating more of it, by definition, doesn't create wealth at all, simply the illusion of wealth.

Each US Dollar is not a magic token that turns into capital, it's a representation of a certain amount of wealth in the country. If the government simply printed a pile of cash and distributed it equally to the citizens, they'd probably spend it. However, the amount of wealth that the cash represents would NOT be present, and producers/sellers would jack up prices to compensate (or else the store shelves would all be empty, or at least that much more empty). Thus, direct money printing leads to almost immediate inflation, which is what happened in Germany: the German government printed money to pay striking workers in the French controlled areas, who went out and bought stuff, resulting in skyrocketing prices quite quickly.

Obviously that isn't a good idea. So what happens now is that the Fed (or central bank of your choice, really) prints up the money and buys bonds or assets from banks with the implicit agreement that the banks will take the effectively free money and loan it out, meaning there will be inflation, but it will be relatively slow inflation as the money doesn't circulate.

However, what's happening right now is that the banks have their money, but they're scared that the economy will tank again even with all the spending. So they're sitting on massive reserves and lending cautiously, which means that inflation isn't kicking in but recovery isn't either. Right now, the US and Europe are tending towards going the way Japan is, with stagnation and not much growth, but not much inflation either because of high savings. However, if a recovery appeared to be on the horizon, the money would start to circulate again, which would lead to a huge growth period followed by a massive depression and possibly heavy inflation. Alternatively, if there was a run on currencies, the banks could panic trying to dump their soon-to-be worthless money, which would make those currencies toilet paper in the process.

Now, to get to your specific points,

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Oh yes it is. The only two things that can cause inflation are related to monetary manipulation or a decrease in the supply of all goods for whatever reason. I challenge you to point out a counterexample.

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The additional currency will create greater investment in the economy but it's unsustainable growth that will inevitably result in a market correction. Again, WEALTH is the driver of growth in a healthy economy, not demand or a great supply of money! People will start building factories, etc because they think the economy has an excess of savings to sustain such long term projects, but when buying will soon discover a lack of resources necessary as while the amount of money increased, the amount of skilled labour, bricks, equipment, steel etc has not. Many would be forced to cancel partially completed projects, creating massive waste and resulting in a recession.

It's a bit like an architect trying to build a house without knowing the correct number of bricks. He thinks he has far more than he actually has, so he designs a magnificent mansion rather than a modest home and gets to work building it. Naturally most people would prefer a mansion to a regular house, but the resources to make it aren't present, and the later he discovers his mistake, the more effort has to be put into demolishing the beginnings of the mansion and the less resources he has to put towards building a house that can actually be made with the resources he has. If he takes too long, he might not even be able to make anything and will have simply wasted everything.

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It normally isn't, but it is when it comes to inflation.

Another thing about inflation is that, because of the way the money is distributed, the rich bankers are the ones who get all the benefits; they effectively get free money and are hit with none of the disadvantages of inflation early on since the market hasn't recognized it yet. Meanwhile, the working man who receives his wage finds that he is able to buy substantially less with what he earns than he could previously, and his wage adjusts to inflation much slower than the stores do.

[Ⓐnarchy in the ☭☭☭P!]

TJ's correct here, of course.

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Oh yes it is. The only two things that can cause inflation are related to monetary manipulation or a decrease in the supply of all goods for whatever reason. I challenge you to point out a counterexample.

Uh...demand-pull inflation happens all the time. It's the main cause of rising gas prices over the past decade, for example.

Would you say that, were the monetary supply not expanding, gas prices would still rise without similar declines in prices in other sectors?

[Ⓐnarchy in the ☭☭☭P!]

TJ's correct here, of course.

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Oh yes it is. The only two things that can cause inflation are related to monetary manipulation or a decrease in the supply of all goods for whatever reason. I challenge you to point out a counterexample.

Uh...demand-pull inflation happens all the time. It's the main cause of rising gas prices over the past decade, for example.

Would you say that, were the monetary supply not expanding, gas prices would still rise without similar declines in prices in other sectors?

Yes, as the price increases are mostly due to international demand not directly related to the American money supply. Even if the US money supply were held constant, countries like China, India, Nigeria, etc. would still be demanding more and more oil, driving up the cost of gasoline everywhere due to the "bidding up" effect in a globalized market.

But that doesn't address the second part of the question.

Assuming people are spending more on gasoline, then they have less money overall. If they have less money overall, then logically they can't be spending money they don't have on other things. Therefore, prices in other goods go down unless there is more money created at the same time.

This is, of course, all ignoring the main problem with inflation in that it creates a misallocation of resources in the economy (of which price increases are just a symptom)

[Ⓐnarchy in the ☭☭☭P!]

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Basic logic knows no economic school.

"If you're going to subscribe to the Heliocentric cult, Copernicus, you could at least recognize that it's a minority position rather than stating all your dogma as if it's indisputable fact. Smiley

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Because people think it is, for a variety of reasons (Portability, ease of division, etc etc etc). If people didn't think it was valuable, they would use something else to back up their currency. It could be plastic poop for all it matters.

However, people in the past tended to gravitate towards backing their currencies with gold, and people who backed their currencies with nothing at all generally didn't do too well.

Why is money more valuable than a lump of plastic? Well, mostly because legal tender laws mean you either use it or you go to jail. It's pretty obvious which system works better

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Hardly. Money, in of itself, is worth nothing. It only becomes worth something when its exchanged for something else, hence "placeholder for value". You can't really do anything else with it besides toilet paper and maybe making kites.

[Ⓐnarchy in the ☭☭☭P!]

You're misunderstanding. My point is that "value" is whatever society decides it is. A piece of paper used as legal tender is just as valuable as the gold you want to "back [it] up" with because people decide that it should be so. That's all.

"In and of itself, worth nothing" doesn't mean anything. "Worth" is not an objective quality.

You're correct, but you're also missing the point.

Yes, everything's value is subjective. However, an objective value (or a price) is reached through the exchange of goods. Joe might think his private jet is worth less than a car, and he might trade away his private jets for the price of cars, but someone is going to buy and resell them at a rate that makes them a profit. You might think a Peso is worth a Dollar, but there are enough people with dollars and pesos that you won't get far trying to trade them at a 1-1 ratio, even if you're the richest man in the world.