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How Fractional Reserves And Inflation Cause Economic Inequality
Submitted by Andreas Marquart via the Ludwig von Mises Institute,
[Editor’s Note: Andreas Marquart and Philipp Bagus recently released a new German-language book, Warum anderen auf Ihre Kosten immer reicher werden — und welche Rolle Staat und Papiergield dabei spielen, about “why others are getting richer at your expense,” now available from FinanzBuch publishers. Mr. Marquart spoke with us about income inequality, Thomas Piketty, and the new book.]
Mises Institute: How would you translate your new book’s title into English?
Andreas Marquant: I would like to say The State Causes the Poverty It Later Claims to Solve. This is the title of my article on mises.org last December. An even better title could be The Austrian Answer to Thomas Piketty.
MI: Your book addresses the issue of income inequality. Is income inequality a bad thing?
AM: First of all, inequality and income inequality are natural phenomena because people are different. They all have different talents and that is a reason for the division of labor. It’s also a reason people work together and it’s a basic part of any complex society. Furthermore, some people are hardworking, others are more lazy. Income inequality is the logical consequence of this. The key question is: is income inequality the result of the free market and the free decisions of voluntary interacting actors; or is income inequality the result of the expansion of fiat money and the creation of money out of thin air that benefits the privileged few at the expense of many? That is, is it the result of state intervention? If the latter, case we have a problem.
MI: When caused by state intervention, what is the primary source of the problem?
AM: The primary source is fiat money inflation and the artificial increase of the money supply by bank credit. The greater fiat money inflation is, the more unjust are the consequences. The early recipients of newly-created money are the winners. The later receivers of the new money are the losers. This is certainly true when prices are clearly increasing, but the same redistribution effect also exists when money creation takes place in a situation where prices for goods and services should be falling but are not. For example, in an economy where worker productivity is increasing, prices should be falling. But even if prices remain more or less constant, a gigantic redistribution through the money printing press may be under way as workers become more productive but see no benefit from it, thanks to inflation.
But the redistribution does not only work through its effects on the prices of goods and services. Have a look at the equity markets. The money created by the FED or the European Central Bank leads to new record-breaking prices at the equity markets. If you have a big block of shares already, you can benefit when this happens, but what if you cannot afford to buy stocks because your energy bill and food expenditures are rising continuously? And often, one very important point is forgotten: the transfer of wealth is irreversible, even if the new money disappears again.
MI: In your book you contend that “good money” is important for economic prosperity. What is good money and why is this true?
AM: Commodity money is good money because it is free-market money. The money supply would be expanded by natural and free production only, through voluntary exchange. This is the reason that in the past, precious metals such as gold and silver were used as money very often. We have good money when the government has nothing to do with the monetary system and people themselves can decide what money they want to use spontaneously and without any coercion from the state.
MI: Someone who objects to your argument might say “Just look at the 19th century. That was a period with a gold standard and capitalism, and yet we saw lots of inequality at that time, didn’t we?”
AM: In that case, banks had the privilege of holding only a fractional gold reserve, which is clearly not a true gold standard. That is, they still could create money out of thin air and give it to some people, while others did not receive this money but had to deal with prices that were higher than they otherwise would have been. So there was indeed a redistribution stemming from the inflationary production of fiduciary media also in the 19th century. And in that case also, the redistribution had a tendency of being in favor of the already well-off since the already-wealthy could provide better guarantees for the loans created out of thin air. Of course, the scale of the monetary redistribution of the 19th century was tiny in comparison with the creation of fiat money today.
That being said, the 19th century was a time of a great industrialization. Railroads and water delivery systems were being built, the steel industry was growing rapidly, and for many entrepreneurial people, it was the chance of a lifetime. Some were more clever and faster than others, so naturally, some people got richer than others in these exciting times of extraordinary growth. But where is the problem if it is the consequence of voluntary interactions? As I noted earlier, inequality is a natural phenomenon. What has to be criticized: if entrepreneurs get subsidies from government or they receive money created out of thin air, then that is a case where one group of people is being forced to benefit another group.
MI: When you looked at Piketty’s book what stood out to you as some of the biggest errors in it?
AM: Piketty’s biggest error is to conclude from the data collected that under capitalism the rich get richer in relation to everyone else. I’m afraid that such a claim is nonsense. Piketty takes his data from a period that is characterized by both capitalism and socialism, and then he attributes everything he dislikes to capitalism. Yet his data is not from a capitalist world. The economic system in which we live today is a crony capitalist system or, we might say, a system of money socialism. And that’s Piketty’s greatest error: to blame capitalism for the negative effects of crony capitalism and money socialism. But perhaps it is no error. Perhaps, he only wants to be loved by politicians and the IMF. I think they love him already, though.
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Fuck it. I give up. I am full tilt focused on becoming an Oligarch now. They have the only game in town worth playing as far as I can see.
count me in.....I'm joinin' too. Of course one might consider the possiblity that this frickin' house of cards just might fall on top of all these pricks then you'd find your head on a lampost somewhere
Glad to have you along. In regards to your admonishment... Meh... I am planning on going the steatlh route... Already transistiong from labor to property... It is going to get tough for sure... But I have given up on the idea of being a vicitm. Adapt or die. Or confine yourself to slavery/victimhood.
Piketty's book sold out of my local bookstore. Soon he will hanging out with Roubini and Robin Thicke. The whole thing will go to his head.
... and who knows, maybe someday he will be hanging with Roubini and Robin Thicke, you know, at coffee shops and various soirees.
I saw what you did there...:)
What's your last names????? If it doesn't end in either 'berg 'stein 'feld 'ski then you're SOL
It's spelled Saul
Approximately 51% of average Americans are really Stupid, clueless and Lazy. The rest of us, minus the elites, are too busy working to do anything about it! Sad really...
But, but, but, we can just tax the excesive profits.
No matter how many times it's repeated on this site, the meme that bank lending "creates money out of thin air" will remain just plain wrong.
Banks lend against assets, which in case of default, they liquidate. It's "your" (haha) house and "your" (haha) car that back the money supply. (Thanks, chumps!)
Or, in the case of a student loan, it's "YOUR ASS FOREVER" (roflmao)...
Then please explain the FED balance sheet- are you going to pay mark to market on the MBS? How about that 500 billion they loaned to foreign banks- no collateral. I could go on...
I decided to add, what do you think a reserve against money loaned is? The FED usually only requires 10% or less (currently around 3%)
In a fractional reserve system, where do you think the interest on the debt comes from? That money has to be "created". Governments don't put up collateral- except your slavery. Why do you think countries go bankrupt? Because they have so much good collateral?
Naturally, if loans are made against artificially pumped-up assets that get bailed out when they fail, the system becomes unworkable. When working correctly, the banksters (and ideally their depositors) get to eat the discounts that accompany forced liquidations as an incentive not to make bad loans, while interest on the debt of good loans will be more than paid for by increased productivity.
Conversely, should the money supply be made arbitrary, based on whatever the supply may be of some yellow-colored comodity, productivity may languish. Like during our colonial period, when money wasn't too plentiful in comparison with the economy's productive possibilities, it was too scarce. Way too scarce. On the other hand, don't kid yourself that inflation cannot kick in under a hard money regime. Like when the Roman Empire, through conquests, saw gold pour in, in quantities that outstripped the productive possibilities extant in its economy.
Actually, as imperfect and as easily gamed as it may be, there has been no better system devised by the mind of man to match money supply with the productive possibilities of an economy than fractional reserve banking. Base the currency itself on whatever you like too, btw.
Sovereign debt is different, of course. Like you say, it is backed by the sovereign's ability to tax its sheeple. And yeah, I'm against it. And, I decided to add, reserves are held against demands for physical cash. Which is why the requirement is so low. Whereas, like it or not, the vast majority of all money isn't even "fiat" paper at all. It's just bookkeeping entries that get printed on your monthly statement, go figure. AND NOTHING ELSE, lol...
However, the system is not unworkable, it continues today. Further, it can be enhanced by global cooperation. An assumption of increased productivity is just that, an assumption.
I never mentioned a hard money regime, so your attempt to deflect the conversation to another topic entirely is disingeniuos. Still, money during the colonal period was many different things, some commodity based, some social credit and some paper backed by land. It worked just fine, until the Colonsts attempted to wage a war they could not afford and became indebted beyond their ability to pay- for debts they did not approve and when state banks iflated supplies and lacked a proper cearinghouse process. Do you really want to try discussing history if you don't even now these basics?
There was a reason why the founders had silver made the basis of our monetary system in the Constitution. They were well aware of the dangers of fractional resrve banking, as described by Blackstone.
Fractional reserve banking is the worse system ever devised and has one single purpose: tp create a debt that can only be serviced by interest payments to enslave the people. No, reserves dictate how much must be held against money borrowed from the FED. See, What Have They Done To Our Money", by Rothbard.
I'm still at a loss for why the state is the scapegoat. When capitalists are presented with the reality that competition leads to consolidation and consolidation leads to entrenchment, they blame it on the party that generally does the dirty work, the government. The problem with this approach is that it presumes that a purely private scenario would be practically different. If it's not the government, then it's a group of thugs making rounds to the local businesses every week wanting their protection money, the company store, etc. In the train of life, the view only changes for the lead mule.
At least with the state, the plebs can get a smidgen of collective bargaining... for a little while.
Because without the State, you can point a gun in the thugs face and blast away. It limits robbery- that is why they used to ambush people in the passes. The State protects the thug with law- inhibiting the citizen, but helping the criminal- especially if the State is "in" on it.
So are you planning on crossing a cartel member? You just going to blast vinni the "[insert generic ominous sounding nickname]" and think the rest of the guys aren't going to get you? If properly utilized, the state can actually enforce the rights of the minority. The problem isn't with the state's eventual failure, it's that people think it is some permanent fixture that magically runs on apathy and tears. Even if the entire populace was incredibly involved, intelligent, and wanted to behave, it would still have a short shelf life. That doesn't mean it's worthless, it just means that we need to have a different perspective and manage our expectations better.
The state eventually only protects those in power... this is why the concept of capitalism being something more than a temporary point on the timeline is pure nuthuggery... given that the state (as neutral regulator) is necessary to ensure the animals play nice on the farm. Capitalists espouse our development as a feather in the hat, but the reality is that the illusion of the potential for wealth (upward social mobility) is simply a better motivator than the assurance of mediocrity. The difference for the average person is no different... and both eventually run out of other peoples' money (labor).
Yes, Vinnie comes to my town, he's dead meat. People who live in the city are so brainwashed. There is a whole world out here that would crush Vinnie and toss him in the hog pen. Vinnie stays in the city, where the state protects him and lets him pay off judges and cops.
The State has Never ensured animals play nice on the farm. Rockerfellers play nice? Bwahahahahahahaha! Capitalism has NOTHING to do with the State and an economy can function on capitalism without it just fine.
Every place that tries what you're discussing wipes their asses with their own hands and hasn't had much of a change for hundreds of years. There are places in this world that don't have a formal state nor laws... but I wouldn't want to go to any of them. [and to claim that rural areas don't benefit from the law nor the urban areas is complete nonsense as well; although I definitely prefer rural].
You act like you're going to clear out the mexican cartels yourself... you live on a border town? Been watching commando a few too many times? I'm guessing that when the head of your neighbor winds up in your mailbox, you might cry a different tune... going to rally the locals are you? Put in a neighborhood watch of mall ninjas? Let me know how it turns out.
Hell, the mexican farmers cleared out the cartels and the only one who stopped them was, ta da! The Government. You're full of shit. The only thing that protects criminals is the law. Without a State, the only law is community.
You don't want to go to those places because you might have to obey the local rules. You might have to respect the people. Guess what? We don't want you out here.
You're the voice of rural humans everywhere? Take the chip off your shoulder and eat it... You're trying so hard to convince us that I can't help but to think we're not your audience.
The local rules exist regardless of the law... the law doesn't exist. It's just a nicety. We're just monkeys with lasers.
Do you actually care to address the substance of my post? Do you want to plant your flag in these places? Best place on earth? You couldn't even be typing this from most of them...
Your substance is you're a Statist. People whom trade security for liberty end of with neither. Now go be a good slave...
I, and the rest of the population, believe that a central governing body is necessary to protect the rights of minorities... which is conceptually the underpinning of the american experiment (of course, they overlooked slavery and universal suffrage a bit...). The state is often easily corrupted and leads to inequitable results. If that was a valid criticism, then you would have to criticize every attempt at organization by humans the same, as they all suffer from the same result (anarchy is no different).
You're complaining about kissing the state's ring, while at the same time welcoming the company store into your posterior. It's six of one, half dozen of another. The state is merely a front... no different than a myriad of other mechanisms of control. Whether it is private or public makes no difference. Again, I haven't seen you articulate how removal of the state would result in any better treatment of the vast majority of the population. You're just making a cosmetic change. Again, show me a state of anarchy, and I'll show you a shithole that no one wants to go to or, alternatively, that is so small and lacks any diversity, rendering it irrelevant.
Well said...
The government's role is to preserve free commerce, primarily through laws preventing outright fraud but more importantly monopolies. Consolidation can only occur through the market domination that government imposes. Businesses tend to get fat and sloppy with age and size, which presents opportunities to new upstarts, providing of course that there is not some legislation that prevents it. Corporations write most of the laws now on the books and they do so expressly for their own benefit and protection. There is no greater consolidation of unaccountable and opaque power than our government, period. Name someone who has lost their job for being a complete fuckup holding a government position. When they finally are pushed aside, it usually comes as a promotion to a job with even greater pay and less accountability. How large will the government have to become before YOU will hold them responsible?
The government's role is to preserve free commerce, primarily through laws preventing outright fraud but more importantly monopolies. Consolidation can only occur through the market domination that government imposes.
This is the paradox of capitalism. On the one hand a neutral regulator is necessary to ensure that competition actually occurs (because rational actors do not choose to normalize their own profits), and on the other hand the regulator is always corrupted (and rather easily) leading to inequality that eventually upsets the system.
Businesses tend to get fat and sloppy with age and size, which presents opportunities to new upstarts.
This is the textbook/knee-jerk answer, but I think reality is different.
It depends on the industry. But, generally speaking, for the oldest industries, the ability for new players is non-existant... the capex and infrastructure necessary are simply too large, the economies of scale too good, and the leaders too devious. The fat and sloppy stage is an issue only for the other fat and sloppy businesses... it doesn't lead to successful upstarts, it only leads to a new year's resolution from existing players... whereby after a few treadmill sessions they go back to de facto apathetic profit-taking positions.
You have a single facility in china that makes all the widgets for the entire world... The only thing you'll be able to do is differentiate because if you try to do low cost, then you'll get your head handed to you. Now, higher energy prices are forcing localization, but practically speaking this is the exception and not the rule. I think if you actually quantified the "opportunity" that it would be smaller and smaller as time progresses... When I was born, every bit of this mudball had been already claimed.
Consolidation happens through private competition as well as governmental involvement...
We have seen some of the biggest corporations in history fall. We have seen upstarts like Bill Gates walk right past IBM. We have venture capitalists begging for the next big idea to invest in. There is no shortage of money to grease these wheels. The real obstacle is government. How many technology businesses went off shore simply due to incredible lead times to simply build a factory, or get permits. How many were blocked by government mandates that were obvious crony relationships? Did you get a half a billion for a solar start-up? Didn't think so. Sure there have been those behemoths like Standard Oil, and AT&T which were split up, probably not to our immediate benefit, but the principle was sound. Now we have mega banks, mega corporations of all sizes that were ALLOWED to become so if not out right PAID to become so. If your belief were true, why did we not find ourselves under the sole ownership of one or two mega entities a hundred years ago? Lots of income disparity then, very little transparency (we barely had newspapers). We are still seeing new upstarts but they are fewer and more speculative then ever before. There is little profit left in working for it. Everything now is about stealing it, faking it, blowing another bubble. The next IPO based on bullshit, but the players will make out well. This is crap and you know it. It is getting much worse and it is not the natural progression of capitalism, it is the natural progression of corruption and the monopoly powers of the State.
Consolidation has limitations... the problem for your thesis is that it typically isn't competition proper. Rather, they're victims of their own success... resource hogs that tend to end up shitting where they eat a bit too much. The reset button gets hit every so often, usually when that disparity in wealth gets to be oh so high, and then we start a bit over again (not fully, because many get to transfer at least a little wealth to the next regime). Over and over and over again.
Rational actors do not compete. There is no mechanism by which to make us compete. This is why capitalism leads to the same end as communism. This is why there is no stasis or anything resembling it. The systems aren't self regulating and inevitably lead to one conclusion, consolidation.
PS, stop with the money on the sidelines nonsense... aside from the fact that it probably comes from the government teet even if it exists... it's one big joke and most of us get the punch line a little late.
In a time when so many are seemingly desperate to glorify being different, be it sexuality or simply a big ugly tattoo that no sane person would consider defacing their body with, we also seem so desperate for consensus of our perceived peers. BE it economics, sociology or climate change, it is important to belong to a group of forward thinking "scientists" who can comfortably look down their noses at the deniers who still insist that what they see and touch has more validity than mental and computer machinations. These people will adopt virtually any thesis that requires the people to forgo their freedom for the sake of collective efficiency. Once they have us all living in stacked boxes eating roughage and vitamin pills for sustenance, with an indelible number etched into our head, one can't help but wonder what miracle next awaits us from their "consensus".
You're either on the bus or trying to blow it up. When the State can convince the population that those are the only choices, it is a very effective slave plantation.
Dependency is slavery. Just because you may have a compassionate master does not change that fact.
There only ever has been one form of capitalism and that would be the crony type....
It just becomes a lot more obvious when multi-billion dollar corporations rule the field...
Show us the crony capitalist who is not beholden to an even greater power of government. Cronyism can only survive and prosper with the aid or indifference of government. There are laws. There is a constitution. They have all been deemed irrelevant when the "public good" is at stake. That's what Barney Frank told a reporter who asked about the constitutionality of a particular bill he was promoting. He responded that constitutionality has no bearing if it is for the good of the people, exactly as the framers warned us. Government is supposed to limit and control monopolies as they were seen as a threat to a free market, and our freedom in general. We are now watching as more and more corporations of every stripe are combining to become way to big to fail. Government has helped create these monsters, especially in banking. Our government has specifically surrendered our freedom to the Federal Reserve and its owners. If it is not a monopoly, I do not know what else is. Our government has had the power to stop this and refuses as it promotes their own agenda, that of dependency. There is no more a dependent society than one that is broke and corrupt.
Yep, but then, there has only been government for the last 5000 years, so something needs to change if we are going to try this baby out. :) (that's my greenie by the way). How you doing Flak?
It's bred into us at this point. And we're becoming dumber and more docile.
People can learn. Liberty is our natural state, so it is not bred, but taught.
Liberty is not our natural state. We desperately seek out organization and the collective. Through this, we give away autonomy. Our natural state is apathy... and after the tree of liberty is momentarily refreshed, we will settle back to apathy... in a hurry... Liberty is something that has to constantly be fought for... and that is something that humans do not do... we seek comfort and consistency. Liberty offers no such thing.
Every creature on Earth lives in liberty, as humans once did as well. This is our natural state. Social organization is natural, but systems of law used to subjugate parts of the population are not. This form of organization showed up later and is the product of sociopathy. All slaves exhibit apathy, epecially if they are subject to audio-visual or violent controls.
Liberty does not have to be fought for, merely demanded by the greater population. All States REQUIRE acceptance to function. Once acceptance is withdrawn, they crumble. People do NOT seek comfort and consistency, it is merely a want. Need is our most compelling driver.
Liberty isn't a state of mind. What you're arguing about happens every few generations, for a split second, and then everyone goes back to ignorance. Most of the time, it's practically an external event brought about solely through the pinnacle of apathy, rather than some proactive, determined act. Which takes even more generations to occur, only forming a fraction of the resets. If liberty was the normal result of these acts, then wouldn't the world be structured differently? We are where we are because the "liberty result" is a small fraction of the resets and can be (and is) washed away in a cycle or two. Those in present control can be brazen with their acts because induction is on their side.
The world isn't moving towards liberty... it's moving towards comfort, often at the expense of liberty. Our minds and bodies are not capable of the constant struggle that liberty requires. Our default state is to be subjects... and so long as it's a tolerable existence, most all of us will choose it. This is your future. Huxley explained it perfectly.
You are correct that the masses are the ultimate arbiter of the future and eventually are the real power. However, that power isn't frequently exercised by any critical mass of the populace... You're arguing the exception and not the rule...
+1 actually we are born seeking comfort, and it takes nearly two decades before we enjoy some liberty. but I don't agree with "Our default state is to be subjects", this is a cultural matter
And again, that is the point of dependency. Place people in an environment where they do not need to be aware, cognizant or thinking to survive and they will stop those processes. Look at the difference between domesticated animals and those in the wild. Animals are domesticated for OUR benefit. The slave owners of the south expressed endless support for the idea that slaves were better off in slavery than left to fend on their own. They saw the factories of the North as the true evil, people left to find work, food and housing on their own. The Christian person would have empathy for the weak and miserable heathen, and force them into captivity, for their own good of course. If they happen to feed, clothe and afford a substantial life to their caretakers, why is that not just? Only rewards to the good samaritan, right? Freedom is not free. It has a cost. But no one has the right to take it away from me simply because they think they have a better idea for me. We are all falling under imminent domain, where not just our land can be taken for the good of the collective, but our money and our freedom, as long as "they" can imagine a more productive use of it.
Sort of. The game plays out the same for the most part, except at a more sophisticated level. In the end, a cheetah beats a gazelle most all of the time.
I don't have a problem with a system that promotes autonomy. My comment was from a biological perspective. For thousands of years we have been bred to conform and obey... It's much more fundamental than our environment. It's a hole that will take generations to dig out from.
You've had people debating this very issue for thousands of years. It isn't simply a matter of letting everyone go to their own free will. We'll be taken advantage of wherever we may be and however situated (always have). The issue isn't that we can stop our dependency (it's actually necessary to have a civilization and it's something humans naturally seek, but I digress), rather the issue is whether or not a system should be implemented where there is more autonomy, given that laws will not actually improve anything they purport to improve. In other words, if creating a nanny state doesn't actually protect the ninnies, then maybe we don't need to go through the effort of a nanny state.
Today a big topic is the huge growth in inequality. Those who look closely understand that it is not the 1% at the top stealing the icing off the cake, but the much smaller .1% or .01% that are skewing the numbers and overreaching.
I contend this goes hand in hand with the massive growth in crony capitalism and corruption. Much of this can be attributed to the ability of those in control "changing the rules" and positioning themselves to benefit at every corner. In our busy and complex world we have found it impossible to watch all the moving parts. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html
More Mises crank nonsense, ZH?
"Mises Institute" is an insane asylum for the syphilitic economic whores and hacks of the Oligarch party.
Money supply extension may also cause economic inequality and this may be relevant only if it is equal to money demand. By suggesting more paper money the government stimulates the inflation and prices growth which will make people more dependent on the banking system. Other words it will make banks’ products and the services like reliable webstore to apply for loan more demanded.