Ron Paul’s Money Illusion

I can appreciate Ron Paul’s libertarian philosophy. And because this is so, it pains me all the more to say what I am about to say. The guy can be a real pinhead at times. And this is never so evident as in his persistent “attacks” against the Fed.

Now, of course, I work at the Fed, so maybe you think I’m just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed:

One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy.

One might indeed say that, Mr. Congressman. But if one did, one would behaving like an opportunistic politician, which I know you are not.

Now, let us examine what is wrong or misleading in the statement above.

First, with the exception of the last sentence (which he weasels around with his “one might say”), there is nothing factually incorrect.  Indeed, the data source cited by Paul is (ironically enough) the Federal Reserve Bank of St. Louis. (I’m glad he trusts us enough for some things.)

So the question is not whether he has his facts straight on this matter. The question is whether these facts matter at all.

There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!

Here is another example of the Congressman misleading the public (perhaps unintentionally); see his recent interview here with CNBC’s Larry Kudlow: Fed Under Fire.

At the 3:50 mark, Kudlow asks Paul: “Would oil be at $102 a barrel now if we had a sound dollar policy?” Paul’s reply is that, if Bretton Woods had not been abandoned (in 1971), oil would now be trading closer to $5 a barrel.

I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?

The Congressman evidently suffers from money illusion. It is an affliction that can be forgiven in most people. But not one who likes to think of himself as a person learned in the finer principles of monetary theory.

And, as an aside, am I the only one who chuckles whenever he berates the Fed for creating money “out of thin air?” (I reiterate, there may be many legitimate complaints one could make against the Fed, but the “out of thin air” charge…well, let’s just say it…lacks substance).

Is it not true that the Treasury also creates its debt “out of thin air?” Do you think getting rid of the Fed (which, in conducting monetary policy, is simply swapping one form of thin air for another) will prevent Congress from issuing its own thin air? Do you really believe that a gold standard would mitigate the government’s ability to tax? (Seigniorage revenue for the U.S. is peanuts as a fraction of total taxation. Moreover, keep in mind that the inflation tax is collected off of foreigners as well.)

Let me conclude by saying that I think that America is, on the whole, well-served by having a voice like Ron Paul in Congress. I’d like to invite him to the SL Fed for lunch one day. I’d ask him to tone down his rhetoric and present his (frequently very good) arguments in a more sober manner.

But maybe this is too much to ask of a politician. Even a libertarian one.

About David Andolfatto 91 Articles

Affiliation: Simon Fraser University and St. Louis Fed

David Andolfatto is a Vice President in the Research Division of the Federal Reserve Bank of St. Louis. He is also a professor of economics at Simon Fraser University.

Professor Andolfatto earned his Ph.D. in economics from the University of Western Ontario in 1994, M.A. and B.B.A. from Simon Fraser University. He was associate professor at the University of Waterloo before moving to Simon Fraser University in 2000.

His current research is focused on reconciling theories of money and banking. His past research has examined questions relating to the business cycle, contract design, bank-runs, unemployment insurance, monetary policy regimes, endogenous debt constraints, and technology diffusion.

Visit: MacroMania, David Andolfatto's Page

219 Comments on Ron Paul’s Money Illusion

  1. I think you’re missing the real issue. The theft that occurs that Congressman Paul has often pointed out when we have inflation occurs in three different instances as prices go up:

    1. When an individual is paying higher prices for goods but is yet to receive an increase in pay.

    2. When an individual, such as somebody living off of a fixed income like social security, is paying higher prices but continues to receive the same fixed income payments.

    3. When an individual is paying higher prices and has any sort of savings account that doesn’t have an increase in interest rates immediately to keep up with the inflation rates.

    If you fail to acknowledge that people who fit into any of the above categories are hurt and robbed by inflation, you are being dishonest. This is Dr. Paul’s point. Would you like to respond?

      • David Andolfatto just be honest and tell us that you want big government. PERIOD.

        JaJa, to be honest, I share many of Ron Paul’s libertarian leanings. I am not against ending the Fed. The Fed was created on behalf of the American people as an act of Congress. Congress has the right and power to eliminate the Fed. If this is what the American people want, then power to the people!

        PS. I am not American.

        • David,

          You give a good example of what is wrong with most media outlets today. You purposely omit fact and take text out of context to make false statement to support your propagandist views – How embarrassed are you for making this statement – “Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).” To justify what the Fed practices.

          Look at the rate of inflation compared to the rate of wage increases over the last twenty years. You work for the Fed and have bias, but yet you decided to write this article and this website decided to publish it – I am embarrassed for both of you.

          P.S. to the Web Admin. You required me to give you my email address so I could comment, but don’t bother contacting me. I have no desire to support propaganda

        • I enjoyed your article – but this is simply not true. In fact, in 1910 the country and many in the Congress were adamantly opposed to a central bank – even the progressive democrats like William Jennings Bryan (although yes, for different reasons than conservative libertarians like Paul). The people of the nation were pushing for legislation that would get the money and power that had accumulated into so few hands (this small group were called the Money Trust back then) and effectively break it up. In effect, the Money Trust were the wolves who dressed up in sheep’s clothing. They designed the legislation in 1910, in private, in collusion with three government employees – Senator Nelson Aldrich, as well as the Secretary and Assistant Secretary of the Treasury at the time. What they created can be defined as nothing other than a cartel. The legislation was intelligently, and quite corruptly, designed – words were carefully chosen in order to intentionally fool the public and members of Congress – ‘central bank,’ ‘cartel,’ etc, these were words that would not appear in the actual legislation, for obvious reasons.

          If the people of this country really know all of this, and were really awake to the fact that banking cartels serve no other purposes than to enslave a nation of people with debt in perpetuity – if this was all well-know – people would be demanding a change. If most people would stop, think and realize that not only has the Federal Reserve failed at its dual mandate, and miserably at that, but they have also presided over the worst financial crisis this country has ever seen. Just look at what the alleged purpose of creating the Federal Reserve was in the first place, and then compare macroeconomic and monetary volatility of the U.S. in the decades leading up to its creation, and after its establishment. Sure – the U.S. had panics and other economic disturbances prior to the Federal Reserve – but until the 1920’s rolled around, this country hadn’t the clue was economic disturbance was all about.

          It’s a failure of momentous proportion.

        • Certainly no one involved in the fed, or any other fiat central banking system, has any interest in protecting the ability of a tiny handful of people to create wealth by pressing the zero button on a keyboard. It’s not particularly appealing to them that they can fund any war, bailout, social program, spy network, campaign, cover up, etc., etc.

          Right, David?

          I mean, do you acknowledge, David, that that kind of power is inherent in any fiat currency system? Well, you have to, because it’s inescapable. A lot of economists’ theories and jargon might gloss over it nicely and make people feel like they aren’t looking at a counterfeiting operation, but the fact remains, a small group of people are creating money from their imaginations. And, lets not forget, guns and threats are directed at anyone who doesn’t participate in their system. Strangely similar to organized crime, ain’t it?

          But I gotta say, David, you’ve managed to put some nice makeup and a good-looking prom dress on this pig.

      • Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher)

        This statement is absolutely false…you are not earning $20 now, you are really earning.05 per cent on every dollar you earn for that same hour you work…nice try…the FED has robbed the value of the dollar by its inflationary policies which eventually produce rising prices on goods. Inflation of the money supply has outpaced the rise in wages…therefore, people are becoming poorer as inflation rises…

    • Jimmy:

      I think you’re missing the real issue. The theft that occurs that Congressman Paul has often pointed out when we have inflation occurs in three different instances as prices go up:

      1. When an individual is paying higher prices for goods but is yet to receive an increase in pay.

      I did not dispute the possibility of short-run money non-neutrality. The question is whether this is true over the long-run (the last 100 years), the way Paul seems to suggest. I say no.

      2. When an individual, such as somebody living off of a fixed income like social security, is paying higher prices but continues to receive the same fixed income payments.

      Over the short-run, fine. But again, I am talking long-run. And you are assuming that in the absence of inflation, a government interested in cutting SS benefits would not simply cut them directly.

      3. When an individual is paying higher prices and has any sort of savings account that doesn’t have an increase in interest rates immediately to keep up with the inflation rates.

      The Fisher relation holds in the long-run. You are wrong.

      If you fail to acknowledge that people who fit into any of the above categories are hurt and robbed by inflation, you are being dishonest. This is Dr. Paul’s point. Would you like to respond?

      My post has nothing to say about inflation. I am talking about long-run differences in the price-level. There is a difference. I should have communicated it better.

      • David wrote:

        “My post has nothing to say about inflation. I am talking about long-run differences in the price-level. There is a difference. I should have communicated it better.”

        Then you are missing Dr Paul’s point, which is NOT ABOUT THE PRICE LEVEL. Rather, it is that inflation (defined as expansion of the money supply) results in a transfer of real wealth:- from those whose cash holdings are not augmented immediately (we may fairly call this group “Main Street”) to those who receive the new money first (“Wall Street”).

        This redistribution of wealth is irreversible, and I see no reason to think that it is mitigated even in the long run. Further, even the short-run effects are always with us as long as the inflationary policy continues.

        • “I see no reason to think that it is mitigated even in the long run.” I’m not an economist, but I agree with this.

          If over “the long run” the Fed has issued money to only selected banks, then those banks have reissued the money with a markup… it seems to me that those banks are winners “over the long run” and everyone else is a loser.

          David, can you explain how people and non-bank organizations are winners over the long-run? Or how this is neutral? It seems counterintuitive to me.

          Frankly, I think the whole issue exists in something of a zero-sum context. And the real issue is TRUST. Does one trust Central Planners or a Free Market?

          You make valid points, but RP is really addressing that fundamental question. So I’m confident that if you had a one-on-one with him, he’d acknowledge your points… but still dismiss them based on his governing philosophy… free market is better than central planning. Both have pros and cons, but reducing centralized power… and empowering the individual is best.

      • David, your answers to Jimmy display a profound and deep ignorance about the nature of inflation and the connection between short and long term effects.

        You casually and almost inconsequentially gloss over the fact that inflation has “short term” wealth transfer effects. You admit that it does, but then you say “in the long run”, money is neutral. Well sure, if inflation in the real world consisted of the Fed inflating the money supply for ONE TIME ONLY, and then no more inflation of the money supply thereafter, then sure, the short term wealth transfer effects will be attenuated, and the long run effect will be to increase prices and nominal incomes.

        But here’s the rub you monetary crank: The Fed CONSTANTLY inflates the money supply over time, which means the long term effects you are talking about are overwhelmed by the constant short term effects that actually take place. Yes, the money used in a given round of Treasury purchases will eventually be spread out into the economy, raising prices and incomes, but no sooner will the effects of that be made, the Fed will have already inflated the money supply once more, which means there is ALWAYS short term wealth transfer effects taking place, which means in the long run, there will have been a constant stream of wealth transfer from those who typically get the new money last (those on fixed incomes, widowers, pensioners, etc) to those who receive the new money first (Wall Street primary dealers, the Treasury, etc).

        Ron Paul was not talking about the long term effects of a single round of inflation, which is, as you said, “neutral.” He knows, as well as those who are not monetary cranks, that inflation is NEVER one time only. The Fed continually creates and then injects new money into specific parts of the economy all the time, and that means the short run effects of inflation (wealth transfer) completely and totally overwhelm the long term effects of way in the past inflation, which has percolated through the economy yes, but by that time, more wealth transfer has taken place because of the continuous inflation from the Fed.

        So if you take the inflation the Fed has continuously created since 1913, then there has been almost 100 years of wealth transfer. THAT is what he means when he said that the Fed has taken 95% of the purchasing power of money.

        You are suffering from the illusion that inflation is not always affecting the economy in the short run, which is just another way of saying it affects the economy in the long run. You mistakenly believe that because a narrow focus on a particular round of inflation, and following those given dollars, will be neutral in the long run, as they spread throughout the economy, increasing prices and incomes, then somehow that means inflation in general is also neutral over the long term. Nothing could be further from the truth.

      • So David you are happy about short run theft(non-neutrality), because in the long run there is “money neutrality”? You are ridiculous.

        The primary dealers earn billions of dollars of fees off your bond, money printing scam every month. There are many of angles for making illicit profit when you print trillions of dollars at will, you are sophisticated to figure a couple of them out.

        You work for a den of thieves admit it.

    • It is not surprising to read a intellectually bankrupt Fed economist call Ron Paul a “pinhead”, ad hominem attacks are all that is left when a argument cannot be attacked with logic.

      David Andolfatto admits that printing money will increase the cost of goods, but he thinks it doesn’t matter because wages will go up the same amount: “money neutrality”…therefore everything is fine nothing else to talk about right?

      Andolfatto neglects to think about or explain why the people who get the money first(the primary bond dealers, corrupt politicians, politically powerful corporations, elite bankers) will get to spend the money on low priced goods while we the masses get stuck with the higher prices. If Andolfatto truly believed in the absoluteness of money neutrality then it seems he would have no problem with counterfeiters! His argument is absurd and his attack of Ron Paul is an embarrassment to those who still think the Federal Reserve serves a legitimate function besides empowering the elite.

    • Total agreement there Jimmy. It just amazes me how we human make things so complicated, why don’t we just go back to before the FED then we don’t need to depend on the FED for our pay raises.

    • Nice try Davey. I like how you are turning into a psychologist and getting in the mind of Ron Paul.

      “… he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor …”

      I’m pretty sure Ron Paul is not arguing that long term wages don’t eventually follow the direction of overall prices. He’s talking about (read the thousands of other articles he’s written) the short term spikes that the Fed and friends use to transfer wealth. You know, the ones they have advance knowledge of so they can pull money in and out of certain investments? If you don’t understand, ask your boss.

  2. The author of this article is woefully misinformed. Of course, the phrase “creating money out of thin air” is a shorthand. Even Ron Paul knows that in practice the situation is much more complex, but the practical effect is as if it were creating money out of nothing. See Robert P. Murphy, ‘The Fed as Giant Counterfeiter’, .

    Regarding the money illusion, it is a flawed Keynesian assumption. Ron Paul is an Austrian economist, so obviously he does not buy into Keynesian argument. As NBER member and IMF chief economist Olivier Blanchard has said, there is no real evidence: “All the models we have seen impose the neutrality of money as a maintained assumption. This is very much a matter of faith, based on theoretical considerations rather than on empirical evidence.”

  3. How do you miss such obvious facts David? Okay, so, your wage has increased since 1913, So what happens to the savings of a 70 year old man? He has been saving his money for 40 years. Do is savings keep up with inflation?

    By the way, yes pay eventually rises as prices do but they are always well behind. If i was to get a raise every time prices went up due to the fed then my employer would have to constantly pay me more almost every single day. The bankers benefit because they get the new money first when it is still worth more because the market hasn’t realized it yet. By the time that money trickles down to me I have already been paying higher prices for a year if not longer.

    Your point about Congressman Paul’s statement about oil is also lacking any serious thought. Yes oil might be 5 dollars a barrel and yes we would be making less money. Does that mean nothing would be effectively different? NO!! When we were on a gold standard before the Fed was created by private bankers money actually gained value! Something that cost 100 dollars at the beginning of the 1800’s cost only 60 by the end of the century. In a capitilist market with real money and without a central bank manipulating it prices go down!!!! So yes, in actual terms, oil would be much more affordable than it is today, and we could actually save for retirement without having to risk our money in a stock market or other risky ventures!

    Seriously, how do you have this job? Do you even think about the things you write about. It’s fools like you that destroy Ron’s honest message. I just pray that some will be smart enough to look into the things you say.

  4. David, in addition to what Jimmy said, you’re also missing the issue of savings. If you had $100 saved in 1913 would then Fed substitute that for $2,000 of todays dollars? No- ones savings are greatly diminished- and they are constantly being diminished when the Fed prints.

    I do agree with you that a move to the gold standard would not mitigate the government’s ability to tax, but that’s another issue that needs to be resolved. It needs to be seen that the governments use of forced taxation is immoral and anti-liberty- it needs to end.

    BTW, if you want to be taken most seriously and provide useful political dialog (something much needed in this country) you would do yourself well to drop the ad hominems like calling people “pinheads”. Just my $0.02.

    Good day.


    • Bryan,

      David, in addition to what Jimmy said, you’re also missing the issue of savings. If you had $100 saved in 1913 would then Fed substitute that for $2,000 of todays dollars? No- ones savings are greatly diminished- and they are constantly being diminished when the Fed prints.

      I do agree with you that a move to the gold standard would not mitigate the government’s ability to tax, but that’s another issue that needs to be resolved. It needs to be seen that the governments use of forced taxation is immoral and anti-liberty- it needs to end.

      BTW, if you want to be taken most seriously and provide useful political dialog (something much needed in this country) you would do yourself well to drop the ad hominems like calling people “pinheads”. Just my $0.02.

      Come on now. No one saves by sticking money under the mattress. Here, let me refer you another blog piece of mine that may give you some pause:

      I didn’t mean to suggest that Paul is a pinhead. I meant to say that he can have pinheaded ideas at times. Just like all of us. But you are right, I should not have said it. It just gets people riled up for no good reason. Thanks.

      • Thanks for the reply. I agree, putting money in a mattress isn’t a good way to go, and I’m not arguing in favor of gold (but many do). Fed or no fed, there is no perfect way to store wealth. The issue is that you have to work to assure your stored Fed notes keep above water whenever the Fed decides to print- it’s a major time sink and you are at the mercy of the Fed board, not the free markets. I point this out as it’s relevant to the money neutrality theory. Still, I agree that the “dollar is only worth $0.04” position needs context and calcification in which money neutrality is a part of. Some Ron Paul supporters do get hysterical about this argument, it’s a recognized problem.

        There are still a lot of other issues with Fed printing that others have pointed out here, such as who gets the new money first is better off since the inflation hasn’t hit the market yet.

        My most important personal issue with the Fed is that I’m forced to use Fed notes, most notable through forced taxation. If I wasn’t required to use Fed notes I wouldn’t, thus I wouldn’t care much what monetary policies the Fed adopts. Without a built in legal demand, backed with deadly force, a fiat currency would quickly die. The fundamental issue is the immorality of forced taxation, the Fed is just peripheral to this. If you think that forced taxation isn’t immoral I’d love to hear the argument.

        Thanks again.

        • Bryan,

          Quote: I agree, putting money in a mattress isn’t a good way to go…

          Don’t agree with this guy, he expects this so that he can prove to the audience that you’re losing your argument…

          Putting money in a mattress should preserve the value of the money (like when putting gold in a matress preserve it). Nobody sayd it’ll increase it, do they? ( Do you see the straw man argument David is putting?)

          What these guys want is give them the money… so that it won’t be your anymore… :-)))

          • Adrian, to be most correct, my statement should have said that “putting Fed notes in a mattress isn’t a good way to go”. I actually thought that David’s straw man was that if I didn’t like Fed notes that gold the was the other option. Saying “money” is totally ambiguous to the casual reader, so thanks for pointing that out.

      • David

        When was the Fed created?

        When was the Great Depression?

        How many periods of panic, recession, and depression happened before the Fed?

        How long a period of time was that?

        How many have happened since the Fed was created?

        How long a period of time was that?

      • There is great reason to get riled up. Trillions of dollars have been straight up stolen from the people and you guys are expecting me and my children to pay interest on it the rest of our lives. Sorry not happening. A revoultion is coming.

        The gig is up…people are saving under their mattresses…just not in cash, silver hit $37/ounce today…physical precious metals people add more every month and the COMEX is going to default.

        There are hundreds of thousands of americans and millions internationally who are awake. I bet you think food prices have nothing to do with monetary policy?(would be interested to know what you think actually). I have to hand it to you, I respect you for talking with people…most fed bankers run to their keynsian fetishists clubs and hide.

      • David, you’re a central planner and a socialist. You fix prices and work for a criminal enterprise. The Fed only exists because of a government mandate. Legalize competing currencies and the Fed would be out of business tomorrow. You dream of being on Ron Paul’s intellectual level, but you deny reality. Anyone who works for the Fed is a socialist, central planner, and scumbag.

  5. Why don’t you just have a listen to these from the floor of Congress and see how the FED was COMPLICIT in the frauds committed upon the entire working class of America.

    Bernanke sent TWO Regulators to look at Lehman’s books…What kind of schmuck do you take me for?

    Tell me what the FED has done in MAIN STREET’s Best Interest PLEASE! PLEASE enlighten us with your Wall Street wisdom….

    • Mikeykeat,

      Well, you can start by looking at this:

      The Fed has remitted record revenues to the Treasury (the American people) through its emergency lending facilities and purchases of American mortgages (MBS). I am not sure how this constitutes a bailout. Perhaps you would have been happier if the Fed lost money on these facilities? You tell me.

      • And our “Treasury” made sure Goldman Sachs got 100 cents on a dollar reward on their “bet” with AIG covering the back end of the mortgages they knew were going to blow up. And then our “Treasury” gave away another $6 Billion of OUR TAX Revenue to Goldman Sachs as evidenced in the article below:

        So they get a tax rate reduction from 34% down to 1%. Then Lloyd Blankfein raises his annual salary from $600K to $1.8 million?

        It can be argued to the cows come home the FED acts in America’s and its Treasury’s best interest. The issue is the FED acts ONLY in the best interest of a thin slice of elites and banks.

        From the link:

        “The banking industry has become much more concentrated as it has grown in recent years. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.”

        As Woodrow Wilson said after signing the Federal Reserve Act:

        “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.” -Woodrow Wilson, after signing the Federal Reserve into existence

        Ron Paul has thankfully awakened the REAL PINHEADS (the US Citizenry inclusive of myself) to the fruadulent moral turpitude perpetrated by the FED on the common working class of America. How can anyone present an arguement that it is in the interest of America to have a secret private group fund our Governments operation WITH INTEREST as opposed to the financial framework initially assembled by the Founding Fathers? The same Founding Fathers whose revolution was against the yoke of servitude to Foreign Banks.

      • We’d be happier if you’d let Goldman Sach and JP Morgan go bankrupt…no need to print money to pay AIG CDS debts to the big banks and then turn around and tell my family to pay interest on that new debt.

        Hey why were house prices so inflated anyway? Remember that money you printed 2000-2006? You made my first home purchase a lot more painful. Taking food out of my kids mouths…feel good buddy? Still think that your neutral money printing had nothing to do with home prices inflating to 7 x income when it was about 2 x income early in the century?

  6. Another example of the theft,

    If I purchase a one year treasury bill that currently yields less than one percent interest at the end of the year I would have have $101 (even less if I have to pay taxes) but because of the current two percent inflation I would actually have less purchasing power. It works out as a pretty nice game if you are the treasury.

      • > Sure, that’s IF you purchase that Treasury note.
        > My advice is: don’t purchase it.
        > No one is forcing you.

        Here you show a fundamental misunderstanding of economics. I purchase dollars with my labor! The vast majority of people who actually real work for a living do that!

        We are forced to use US Dollars because of legal tender and tax rules.

        Do you not comprehend that us serfs are compelled by the government (and the Federal Reserve) to be involved in a scheme that we don’t want to be involved in AT ALL???

        It is a scheme that we know exists solely to profit the “financial services” industry at our expense. There is no other excuse for it.

  7. Your First “point”

    You missed the mark on this one as you don’t understand the nature of inflation. Specifically, the lag between wages and price inflation. If wages magically increased with prices the moment money was created we probably wouldn’t even have a word for inflation.

    But that is not the case now is it. Since inflation is haphazard, wages in some sectors can lag years behind prices. This is where the injustice of the inflation is. And Guess who suffers the most from this lag? The working poor! The people at the bottom of the pyramid who get the new money last. Shame on you.

    Your second “point” . If money is a medium of exchange in which value is attached. What is the medium called money ultimately exchanging? Labor. When you debase money you debase our labor. In lieu of a barter system, we have no choice but to use your Federal Reserve notes to trade our labor due to legal tender laws.

    You conclude your article with some rambling nonsense that doesn’t serve to make a succinct point. But it reveals much confusion on your part as to where Mr. Paul stands on and what his reform would be. (yes your precious Fed would be consigned to the dust bin of history but you can’t correctly identify his alternative.) How can you not know?

  8. I appreciate your attempt to contribute to the issue, but you missed the point. Most have already stated, so I am probably being redundant, but I wanted to speak my mind. The comparison is made to theft because savings are essentially depleted to pay off debts (which also lose value as the savings lose value, unless the interest rate is higher, in which it would remain the same. But considering the Fed tries to keep interest rates ridiculously low, this is clearly not the case). In fact, paul even refuted the “everything stays the same” argument, as have many other austrians.

    Inflation does not effect everyone evenly and at the same time. It benefits whoever gets the new money before everyone else. In the end, everyone may have the same real wages, but the way the got there is unequal. Some people get the money before prices rise, making them better off. But most people see the prices rise before their wages, hurting them. It is simply a more devious example of distribution of wealth, masking by helping the economy and the American people. It is so successful at tricking people that even honest people like you, David, are prone to its deception.

  9. Bravo Jimmy-

    I must admit- I am greatly appreciative of the authors TONE in this editorial piece

    Neutrality is an interesting point, but it is not enough to discredit the congressman’s position as ILLUSION-

    I look foward to reading the authors response to Jimmy , because the very factors stated so eloquently is exactly why there is an everwidening gap between lower and upper class-

    Once you retire , become disabled, or loose employment- there is brutal consequences sending these formerly productive persons into fixed budget POVERTY-

    In turn— leaving houses and assets to be claimed and sold by the government in reverse mortgage schemes set up to take care of Medicare or Medicade recipients in their later years– but for a price- Robbing families of hard earned legacies because of the unexplainable increase in medical cost-

    What cost $1 at a doctors office in 1913 , now cost $5000 due to profiteering ( as opposed to the $20 you stated)

    Many commodities have gone this route-

    So, where is the answer there?
    I smell either inflation or another problem that is less talked about-
    Joint Monopolies of sister industries that is condutive to cost of living increases- that should be offset by your neutrality spin— but are not-

    Haves vs have nots 101

  10. David, stop hiding under your desk and respond to the legitimate claims that your piece is factually and philosophically wrong. To do otherwise will confirm this as nothing more than a hit piece, lets talk David.

    • Handyman,

      I was not hiding under my desk. I was just not aware that this discussion was taking place. I think it was you who alerted me to it via an email. Thank you for doing so.

  11. “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.” -Woodrow Wilson, after signing the Federal Reserve into existence

  12. David,

    How can you not know this? Better question – How the hell did you get a job with the FED? Never mind – they don’t hire people that think for themselves.

    My guess is your stalling for time. Tick – Tock

  13. This guy is a professor of economics!!!! How does someone so clueless teach others? Gee, I wonder why so many college kids are protesting at the statehouse in wisconsin? Clueless teaching clueless.

  14. Andolfatto is inconsistent in his argument.

    He first argues price-to-wage ratios and then admits to seigniorage which is a tax on anything dollars. He insists this is small, and even if he looks at only the portion for the federal government, it is not small.

    But, going back to price to wage ratios, he forgets that there is a central source of the creation of money so there is a dynamic effect. Just as surfers ride waves, so do those close to the source of money.

    Even without the wave of money, just the noise created by trying to match prices and wages in shifts as the pool increase through this wave is damaging.

    In addition, people would made different choices were money stabilized. The difference between what one earns in savings in that case compared to under the Fed could be as much as 12%. Instead of losing values, savings might actually grow in wealth. Folks would have homes but home mortgages would be rare. Americans would own America. People would make better investments.

    The repeated Fed argument that both wages and prices go up does not wash.

  15. If you work at the Fed all I can say is go to hell and I god dam hate you. I pray that famine and pestilence hits you and your family.

    • Whoa, Joe… simmer down. While I don’t agree with the author’s article any more than nearly everyone else who has commented here, resorting to vulgar verbal attacks does nothing to further meaningful discourse. In the end, the author is likely employee #2356 with the Fed, works behind a desk shuffling papers with a very specific job function, earns a paycheck and goes home to try and take care of himself and his family just like you and I do. Even Bernanke is nothing more than a puppet controlled by the unseen and unknown. It’s not the author’s fault the Fed is here or even that they do what they do.

      Taking the communicatory high road is immensely more effective to getting your point across in the “long-run”… pun definitely intended.

  16. David.
    Do you believe in the Mundell-Tobin effects? There is a long-standing debate about the Fisher hypothesis – independence between real rate and expected inflation. The data summarily rejects that. Run a VAR of real consumption growth and price changes and you will see. In fact, the grainger causilty term suggests that higher inflation is associated with contraction of real activities. Anyway, as an economist I am sure you don’t like price fixing. But, you do like to set interest rates. Care to comment?

    • The price-fixed comment is a good one. As you suspected, my free-market tendencies lead me away from the idea that price-fixing by a central authority is good. And indeed, the Fed, via its “Taylor rule” policy can be accused of fixing the short-term nominal interest rate. An alternative rule would be to fixed the rate of expansion of base money, along the lines that Friedman advocated long ago.

      • Which begs the question if you’re going to be fixing a certain rate of expansion of the monetary base, why not just leave it completely fixed? I.e. why have an expansion rule instead of a non-growth rule? In what way does the economy benefit from an expansion of the monetary base?

      • If we are going to follow Friedman’s proposition, we do not need a Fed. We need a room with a machine and no keys. If there are serious economists engaging in monetary policy at the Fed, tell me how come they aren’t honest about moral hazards of central planning. Risk-free interest rate is the price of certainty equivalence. Fed monetary policy actions perturb that equilibrium in the market. And don’t even start with targetting BLS inflation? It has become a running joke.

        Anyways, my point is Ron Paul’s criticism of the Fed is very valid. I also think you mischaracterize his support for the gold standard. It is certainly the case that he thinks favorable of the gold standard, but he advocates a competing currency. I think he has also introduced bills in Congress to legalize competing currency. As an economist, I hope you don’t fear a little competition.

  17. this guy aviousely dosent have a life and wants a pice of the pie to be famouse talking about sewage crap but dont blame him there is many like him. But,


  18. “”Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).””

    Oh this is the best one in the white shoe boy’s piece. He don’t care because he’s never worked a real day in his life. He’s never worked in the real world. He’s never had to pay the bills. He’s a god dam white shoe boy. He’s never worked a day of labor in his life. He’s probably never raised a family. He thinks he cool and can dismiss the hate and anger, but the white shoe boy is wrong. END THE GODDAM FED! Return me to sound money white shoe boy.

    • Uh, thank you Joe.

      For the record, I worked for many years in the construction sector, alongside my dad. I lost my job in the recession of 1982. I do not blame Fed Chair Paul Volker for that experience though.

  19. All I can say is my 85 year old mother still works and earns her keep, while lowlifes collect free handouts. She is robbed of her earnings with higher prices for goods. And this white shoe boy and his money printing machine and assholes in Washington with there tax machine tell her to pay more with less. I can’t wait for the spark. Bring it on white shoe boy!

  20. Then you state:

    David you state:

    “There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.”

    The most important is “in the long run”. As everyone above has pointed out the working poor trying to save and increase their wealth are on the wrong end of the long run and as such loose. In truth, because of continuous inflation those working poor never catch up, they are always losing purchasing power behind the inflation curve.

    You then state:

    “Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

    So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!”

    Do you not see the contraindication in your conclusion? Your money neutrality theory contradicts the idea of wage increases. It actual states we have had no wage increase but stagnation even in the face of higher efficient productivity.

    So in conclusion, being on the wrong end of the inflation curve, coupled with your money neutrality example, that states we have had no real wage increase but stagnation, workers are actually always losing purchasing power and the ability to create wealth through savings to the Fed.

    So David, “How do like them apples?”

    • Fudwamper:

      I’m afraid I do not see the point you are trying to make.
      For the record, real per capita income (and virtually all real quantities, including real wages) have been growing on average at about 2% per annum over the last century in the US. That’s fast enough to double real incomes every 36 years or so. I do not think that inflation, or Fed policy in general, has any material impact on this real rate of economic growth. This is my point.

        • Hey guys I ahve to back David up. Counterfeiting actualy helps the economy… or at least it doesn’t hurt it in the long run. Gee when do I get my job at the Fed? I could be a good justifier of theft David, see?

  21. I appreciate that the author of this article does not use the usual degrading and dismissive language when discussing this issue.

    I would also love to hear a counter argument to Jimmys (and others) points, as of yet I have never heard anyone give a suitable reason why Ron Paul (and the entire Austrian economic theory) is wrong here. From what I have seen inflation is nothing more than an attempt to force people to make investments they would not otherwise make (risky) just in order to stay ahead of the curve. This might be fine for people who make there livelihood in the financial sector, but for normal working people these investments are a serious burden.

    To those leaving disrespectful comments: As far as I can tell Ron Paul has made it his life mission to encourage dialog on these issues. I believe you are doing him a disservice when you shut down these discussion with rudeness vs encourage them with reasoned positive responses.

  22. Here is an author who is trying to bluff it — just like the Fed. Here is a writer who actually congratulates the Fed for persistently diminishing the purchasing power of the dollar. To counter his own stupid comparison — this means that a silk tie that would cost you $1 in 1913 would now cost you $20 now. His glee at earning a dollar an hour in 1913 and earning 20 dollars per hour nows is so remarkably dumb.

    Just because the dollar digits go up, does not mean that you can necessarily purchase more for your buck does it?

    It takes a real blind idiot to completely misunderstand the importance of actual purchasing power.

    • Bill Jencks,

      I’m afraid you missed the point. My claim that the Fed was responsible for increasing incomes by a factor of 20 IS ridiculous. It was meant to be ridiculous. But it is exactly the SAME argument that Paul uses, but in reverse. Open your eyes, and ye shall see.


    How do you define a dollar, David? You failed to accurately define the currency you help to advance.

    Inflation causes chaos. Not the opposite.

    • John Dadis:

      I thought it was funny when Paul asked Bernanke to define the dollar (Beranke’s response was equally funny).

      The term originates from the German “Thaler.” Historically, it measured a specific weight of gold (not uniform across all dollar measures). With the abandonment of the gold standard, the “dollar” is now simply an accounting unit. It is like asking me to define what I mean by an “inch” or a “mile.”

      • If the Fed was in charge of measurements, there would have been 12 inches in a foot yesterday, 13 inches today, and would be 14 tomorrow.

      • So David when the fed and income taxes were instituted I believe the average wage was around $2000 that was not taxed which is the equivalent of around $69000 in silver or $55000 in gold the non manipulate-able by politicians and bureaucrats form of money that comes in a specific weight that cannot be changed.How much would the tax be on the equivalent income be on the silver or gold be??A lot more than zero I suspect.What I believe most people object to is the non stop justification by people manipulate and profit from the current system.This system will end because it doesn’t make any sense for the people under the well off and connected.I know personally a developer who is also the head of the chamber of commerce who says things are getting better however I run a business that has laid off a person who has worked for 17 years and reduced the hours of another long term employee,the difference is access to politicians and credit. Things look great with the right perspective.

  24. Money illusion is a false concept as the third party, the fed, decide the value of money. It should be fixed to the market, which would still change, but not based upon the whim of a small group of private bankers.
    Inflation really is a tax on fixed income and savings. It also gives the illusion of growth.

    Maybe if I could print money in secret everything would be ok. I would.

  25. wow i have never read more outright twisted bulshitt in my life. When the money supply inflates the only reason a person’s wages go up is because your forcing them to make more money due to price increase. They arent being paid more. You are taking money straight from EVERYONE and putting it where you want. YOU ARE A LIAR AND FUCKING IDIOT.

  26. hey pinhead
    how about people on fixed incomes and those who do not receive a cost of living raise?
    how about those who save and watch as their saved dollars buy less each day?
    the purchasing power of the dollar goes down which robs these people of their wealth
    ron paul is exactly correct about this
    you can try to execute your agenda and marginalize the truth sayers but in the end you will fail because you can only keep people in the dark for so long

  27. The author of the article seems to like many of Ron Paul’s ideas. If his only problem is with Ron’s take on the Fed, he should have no problem voting for the man. Ron is clearly more educated than the other potential candidates and he is honest. What else does a voter need to know?

    • You almost have it right.

      First, if I did vote (which I am not permitted to do in this country), I could do worse than cast a vote for Ron Paul.

      Second, it is not that I am attacking Paul for attacking the Fed. I am attacking specific arguments he makes in his attack of the Fed. These arguments are silly. He should focus on the arguments that make sense. There is a legitimate debate to be had over the proper structure of the money and banking system in an economy.

      In 1913, Congress thought it was a good idea to create the Fed. The Fed is a creature of Congress. The Fed behaves in the way that is stipulated by the Federal Reserve Act — an act of Congress.

      If you do not like the Federal Reserve Act, then fine. Ask Congress to revoke it. But what is the point of “blaming the Fed?” I don’t get it.

      • You’ve said:

        “In 1913, Congress thought it was a good idea to create the Fed. The Fed is a creature of Congress. The Fed behaves in the way that is stipulated by the Federal Reserve Act — an act of Congress.”

        “There are always people in any society that feel hard done by, that fall by the wayside, that feel victimized by the “power brokers.” The Fed is simply a convenient scapegoat. I sometimes wonder whether this was the reason it was created by Congress.”

        YOU’RE WRONG.

        Congress is the scapegoat, and the Fed is a creature from Jekyll Island.

        You need to find an hour, a comfortable seat, and listen to the following speech before you repeat the above quoted *propaganda* ever again:


      • if you want to call ron paul`s argument silly-
        please give us your definition of inflation-and please explain to us why the dollar has lost about 94% of it`s buying power since 1913….

      • The Fed was created in response to the crash of 1907 that was due to fractional reserve banking which in some ways is akin to a Ponzi scheme (in a Ponzi scheme if a large fraction of investors withdraw their assets, the system collapses. The same is true with fractional reserve banking)..
        Technically the Fed is unconstitutional because the constitution prohibits issuance of bills of credit

  28. Money (paper reserve notes) is money because people still think it is and can buy stuff. People quit thinking that its money, it quits being money.

    That’s the beauty of any kind of “consumer confidence” inspiring headline that may say something like, “Fewer Jobless Claims Last Quarter” or anything as vague as that… and guess what? 50,000 “consumers” thinking all will be well again, will run out and buy flat screen TVs… on credit probably.

  29. David, it is difficult to shake someones hand with the right hand and slap them in the face with the other, isn’t it? It didn’t work out for you this time. How much did the Fed pay you to write this article? Or is that rolled into your university salary?

    • Jeff,

      Yes, it doesn’t seem to have worked out. I should not have called the Congressman a pinhead. But then, I didn’t expect my blog to picked up by Wallstreet Pit. There ya go.

      Btw, I was not paid anything to write that article. It reflects my own honest opinions. The purpose of the blog is to stimulate debate. The wage I earn is in the form of increased understanding. Thanks.

  30. Pablo Escobar:

    Regarding the money illusion, it is a flawed Keynesian assumption. Ron Paul is an Austrian economist, so obviously he does not buy into Keynesian argument. As NBER member and IMF chief economist Olivier Blanchard has said, there is no real evidence: “All the models we have seen impose the neutrality of money as a maintained assumption. This is very much a matter of faith, based on theoretical considerations rather than on empirical evidence.”

    You suggest that I am a “Keynesian.” I am not. So right off the bat you have something wrong. And Blanchard is talking about short-run non-neutrality. My post is about long-run non-neutrality. You should learn to read more carefully before claiming that somebody is “woefully uninformed.”

  31. What an embarrassingly horrible column.

    Dear David, any prejudgment I might have made against you prior to reading this may well have been because I did not know you. But now that I have read this, I know without a doubt that you are either utterly dishonest or a very, very, dim bulb.

    You write, “I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion.”

    Pardon? So you agree that what he says may be true, but you disagree because of something that you claim he implies? But the only reason you have for thinking he implies it is that you made it up? Nowhere in any of the quotes you provided does Ron Paul imply such a thing. Nowhere does he deny the principle of money neutrality, either implicitly or explicitly. As I would have hoped you would be aware, Ron Paul is pretty well-read in the Austrian economists, who clearly taught money neutrality, and who also clearly and cogently argued against central banking and the so-called “inflation tax” that it necessarily entails, which redistributes wealth from those holding old currency to those getting new currency. The neutrality of money doesn’t in any way mitigate against this.

    I also noticed how you conveniently only spoke about the affect of devaluation of the dollar on our wages, without mentioning its affect on our savings. That can’t have been accidental. You must think we’re all pinheads as well.

    • Eric,

      Well, maybe I’m not the sharpest tool in the shed, that’s true. But I suggest that your assessment of my post is based on your own complete misunderstanding of what I am trying to say; and that this, quite possibly, is the consequence of my inability to express ideas clearly.


  32. David,

    This article shows us many things under the surface. It’s unfortunate that you felt the need to attack one of the only honest politicians, and also understands economics.

    Clearly you are beholden to your statist allies at the Fed, and you are cowtowing in an attempt to show loyalty. I’m guessing that a new position opened up and you are hoping to better yourself somehow financially since you could not succeed in the real world of economics, being that you lack certain cognitive abilities.

    Your ethics and character are not impressive either as you fail to properly refute the many good points raised in the above comments.

    Big gov’t trumpeteer and very litle substance is all I read in this hit piece.

    • Rational Thinker:

      You should change your handle.

      I think it is my right to attack silly ideas. Ron Paul may know more economics than most politicians, but he is an MD, not a professional economist. I don’t lecture him on how to conduct a hernia operation.

      And if I am so beholden to my “statist allies at the Fed,” how do you explain this post of mine:

      Strike two for you.

      And as for the ethics and character charge, strike three.

      You are out.

      • “I think it is my right to attack silly ideas. Ron Paul may know more economics than most politicians, but he is an MD, not a professional economist. I don’t lecture him on how to conduct a hernia operation.”

        This begs the question: What/who is a *Professional Economist*?

        I would say, if Ron Paul is not a *Professional Economist* — nobody is, because he has been consistently correct in the most epic ways where all of his opposites have been consistently wrong in the most epic ways.

      • So far I have to say the absolutely worst comment was suggesting that Ron Paul is wrong because he is a Doctor. Sorry, but a doctor can be correct about something regardless of his profession. I am a musician it’s what I do for a living. However, that doesn’t mean that you can’t play music even better than me (if you study and pracitce hard enough)just because you chose a different line of work.

        Also your insistance on the long term effects of inflation while ignoring the short term effects is were you simply lost this debate. I’m sure you know this though.

      • People who support the idea that it is good to give the monopoly rights to printing money to a small secretive group have employed thousands of professional economist. These economist all work at the Federal Reserve Bank. They fund significant portions of all the major colleges. These economist sit around all day and thank their luck that they have good jobs. When they are needed to write articles defending the institution that pays their salary they do so. They say it doesn’t matter if they print money(has no affect on who becomes rich and who doesn’t)…but IT IS EXTREMELY IMPORTANT THAT THEY KEEP THIS POWER …and if you don’t support it they call you names. David admits in this Q&A that yes it is theft in the short run…TOUGH SHIT. Do something about it bitches.

  33. David, you didn’t come out from under your desk for very long now did you? I am still patiently waiting for a response to many of the opposing opinions on this topic. I really need for you to explain a few things to us.

    I think your students will be sorely disappointed if you do anything less, just as I will be.

      • I learned a lesson a long ago, don’t get into conversations that I am not qualified to enter. I read these blogs for my own edification. There is a presidential election in 2012 and I’d like to be an informed voter. If you will simply respond to the many questions regarding your piece it will go far in helping me decide who is full of hot air and who is not.

        I realize that you depend on the less educated to make ill-informed statements as they are so easily disemboweled. I prefer to listen, so I’ll just stand by and hope that I get more than just entertainment from this post as the only substance that can be found thus far is in the comment section.

  34. I agree with you david. The dollar devaluation that Ron Paul so often criticizes doesn’t have nearly as big an impact as he and a lot of supporters seem to think. However a lot of his other arguments are very true. For instance his criticism of the Feds easy monetary policy and interest rate manipulation are still good points.

    • Morgan,

      Precisely. And the silly arguments he makes detracts from the force of the good ones he could make. His rhetoric simply helps fuel unthinking anger; and I think we see plenty of evidence of this here.

      • You have reduced all the previous posts to “unthinking anger; and I think we see plenty of evidence of this here”

        That was a reasoned and well supported response to the posters.. Thank you for clearing things up for me and perhaps many others who unsure of why we felt the way we do. It’s anger, you are right.

  35. What is the price of gold telling you David?

    It’s amazing to watch the Fed ignore Gold prices…I am not in favor of a gold standard but their needs to be limits to what the federal reserve can and cannot do. Why not allow competing currency and see what the people choose to save their wealth in. I bet it wouldn’t be dollars!

      • Sure David, I have that option as an investor but what about my elderly mother or someone that knows nothing of investments. Most folks simply do not have the $$$ or the options to get out of the dollar and it’s illegal to issue any other currency to compete. How are poor people supposed to go buy real estate or stocks with meager amounts of money? They are forced to save with US Dollars, or not really save at all. With that dollar comes 14 trillion of debt hanging alongside. 14 TTTTTTRILLLION! Give the poor folks a legal alternative

        Your viewpoint on this is telling…you are speaking to 5% of the population that has that kind of money. It’s the 95% of the masses that you should be explaining why you erode their savings year in and year out.

      • First of all gold is not an investment as it does not produce returns .. It is money.. there is a huge difference between the two..
        Also regarding storing wealth in other assets is more difficult because we need to pay taxes if we purchase gold/euros/real estate/stocks etc and we cannot use gold to purchase items because of the legal tender laws…

  36. David, you miss the point all together. Its true as you said, that wages also increased. Where someone made only 1 dollar in 1913, they make 20 dollars now. The problem here, as mentioned already, is that wages to not increase at the same rate with inflation. Inflation happens, then a year or two wages start to increase. All during that time savings are eroded, people spend more on their purchases, in general the middle class gets poorer while you and your elite stay on top. I’m sure you think thats fine.

    Another problem is that wages are usually increased based on the CPI. And that is how the Government and the Fed measure inflation. The problem is that the CPI calculations change over time to make inflation look better. For example, not measuring food and energy prices. What do we spend most of our money on? Yeah, food and energy. What has been increasing in price at frightening rates? Yeah, food and energy. What has been told (lied) to us? Inflation is low. So while we are spending more of our money on food and energy, eroding our wealth, we are not getting your Cost of Living increases, because the Government and Fed decide to make inflation look low by not measuring it properly.

    Tell me, why in the middle of the century could 1 person work in a family and could afford a home, car, food, education. But now 2 people need to work to afford a home, car, food, and not education… Inflation. Because your Fed has been printing money at the request of Congress. Because its not limited by anything so you can keep increasing the total dollars.

    Tell me, who in America has had their wages increased by the same amount that the Fed has increased the money supply? I have not. No one I know has received a large increase in their wage. Maybe several years from now when the damage and erosion has already happened, when its too late, will our wages start to creep up.

    The power the Fed wields of being able to print up money when needed is a power that no one should be allowed. Before you say it, No. Congress CANNOT print up money. America is ONLY allowed to use GOLD and SILVER as money. That’s it. Be happy that you have been able to rape Americans of their wealth for almost 100 years, it has to end. Either Americans end it and keep our sovereign state, or you in the Fed keep destroying the dollar to the point where it collapses all together and force us to run to an International body to bail us out. You make me sick David.

    Or maybe you just wrote this about Ron Paul to get traffic to your article. Many people seem to take advantage of his popularity that way.

    • I apologize. Maybe you, David, do not make me sick. But Bernanke, Geithner, and the rest of these big Government Democrats and Republicans (or RHINO) make me sick. I was watching an interview with Geithner at one of the International Banking conferences on CSPAN, and it was quite obvious he knew that he was lying in his answers. You could see it in his laughs and smiles while answering that he knew, and knew that we knew, that he was actively deceiving and lying. I guess he felt comfortable with fellow globalists surrounding him, but had to pretend in what he was saying for the viewers of CSPAN.

    • etieseler,

      What you say is simply not true. Real incomes have (on average) been growing at 2% per annum for at least 100 years. True, there has been some divergence in this growth in recent decades across different groups of society. But the generaal trend has been upward. Generally speaking, we can afford way more real goods and services than our ancestors of a generation ago. This is what the data tells us. The Fed has had, in my view, almost nothing to do with this. It is American ingenuity and hard work at play.

      There are always people in any society that feel hard done by, that fall by the wayside, that feel victimized by the “power brokers.” The Fed is simply a convenient scapegoat. I sometimes wonder whether this was the reason it was created by Congress.

      I’m sorry that I make you feel sick.

  37. The thing that upsets me the most is the revolving door at the Fed with all the banks. Why can’t they hire people oustide of the circle and get some differing perspectives. They have allowed so much conflict of interest that it’s now just a good ole boys club. It’s truely so unamerican that it makes me sick…It’s corporate welfare if you have the right connections. We all know this. Most of the public is coming around to this and thank god for it

    • JoBe,

      You all know this?

      Wasn’t it Mark Twain who said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

      Be careful in what you (think you) know, JoBe.

      • Do you really want me to start a list of all the positions held in the revolving door between goverment/fed/commericial banks? Ok I will. Next post will be federal reserve/goverment connections

        From the CBS article

        Just for Goldman Sachs

        Our alphabetical list:

        Joshua Bolten

        Government: President George W. Bush’s Chief of Staff from 2006-2009; Director of Office of Management and Budget from 2003-2006; White House Deputy Chief of Staff from January 20, 2001 – June 2003.

        Goldman: Executive Director of Legal Affairs for Goldman based in London aka the bank’s chief lobbyist to the EU from 1994-1999.

        Kenneth D. Brody

        Government: President and Chairman of the Export-Import Bank of the United States (1993-1996).

        Goldman: Former general partner and member of the Management Committee at Goldman Sachs where he worked from 1971-1991.

        Kathleen Brown

        Government: Former California State Treasurer

        Goldman: Senior Advisor responsible for Public Finance, Western Region.

        Mark Carney

        Government: Governor of the Bank of Canada since 2008.

        Goldman: Mr. Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York, and Toronto offices. His progressively senior positions included Co-Head of Sovereign Risk; Executive Director, Emerging Debt Capital Markets; and Managing Director, Investment Banking. He stated at Goldman in 1995.

        Robert Cogorno

        Government: Former Gephardt aide and one-time floor director for Steny Hoyer (D-MD.), the No. 2 House Democrat.

        Goldman: Works for [Steve] Elmendorf Strategies, which lobbies for Goldman.

        Kenneth Connolly

        Government: Staff Director of the Senate Environment & Public Works Committee 2001-2006.

        Goldman: Vice President at Goldman from June 2008 – present.

        E. Gerald Corrigan

        Government: President of the New York Fed from 1985 to 1993.

        Goldman: Joined Goldman Sachs in 1994 and currently is a partner and managing director; he was also appointed chairman of GS Bank USA, the firm’s holding company, in September 2008.

        Jon Corzine

        Government: Governor of New Jersey from 2006-2010; U.S. Senator from 2001-2006 where he served on the Banking and Budget Committees.

        Goldman: Former Goldman CEO. Worked at Goldman from 1975-1998.

        Gavyn Davies

        Government: Former chairman of the BBC from 2001 -2004.

        Goldman: Chief Economist at Goldman where he worked from 1986-2001.

        Paul Dighton

        Government: Chief executive of the London Operating Committee of the Olympic Games (LOCOG).

        Goldman: Former COO of Goldman where he worked for 22 years beginning in 1983.

        Mario Draghi

        Government: Head [Governor] of the Bank of Italy since January 2006.

        Goldman: Vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee from 2002-2005.

        William Dudley

        Government: President Federal Reserve Bank of New York City (2009-present)

        Goldman: Partner and Managing Director. Worked at Goldman from 1986-2007.

        Steven Elmendorf

        Government: Senior Advisor to then-House minority Leader Richard Gephardt.

        Goldman: Now runs his own lobbying firm, where Goldman is one of his clients.

        Dina Farrell

        Government: Deputy Director, National Economic Council, Obama Administration since January 2009.

        Goldman: Financial Analyst at Goldman Sachs from 1987-1989.

        Edward C. Forst

        Government: Advisor to Treasury Secretary, Henry Paulson in 2008.

        Goldman: Former Global Head of the Investment Management Division at Goldman where he worked from 1994-2008.

        Randall M. Fort

        Government: Assistant Secretary of State for Intelligence and Research from November 2006-Jan 2009.

        Goldman: Director of Global Security 1996-2006.

        Henry H. Fowler

        Government: Secretary of the Treasury from 1965-1968.

        Goldman: After leaving the Treasury Department, Fowler joined Goldman Sachs in New York City as a partner.

        Stephen Friedman

        Government: Chairman of the President’s Foreign Intelligence Advisory Board and of the Intelligence Oversight Board; Chairman Federal Reserve Bank of New York from 2008- 2009; former director of Bush’s National Economic Council. Economic Advisor to President Bush from 2002-2004.

        Goldman: Former Co-Chairman at Goldman Sachs and still a member of their board. Joined Goldman in 1966

        Gary Gensler

        Government: Chairman of the U.S. Commodity Futures Trading Commission since 2009; Undersecretary to the Treasury from 1999 to 2001; Assistant Secretary to the Treasury from 1997-1999.

        Goldman: Former Co-head of Finance for Goldman Sachs worldwide. Worked at Goldman from 1979-1997.

        Lord Brian Griffiths

        Government: Head of the Prime Minister’s Policy Unit from 1985 to 1990.

        Goldman: International Advisor since 1991.

        Jim Himes

        Government: Congressman from Connecticut (on Committee on Financial Services) since 2009. Goldman: Began working at Goldman in 1990 and was eventually promoted to Vice President.

        Robert D. Hormats

        Government: Under Secretary of State for Economic, Energy and Agricultural Affairs-designate since July 2009; Assistant Secretary of State for Economic and Business affairs from 1981 to 1982.

        Goldman: Vice Chairman of Goldman Sachs International and Managing Director of Goldman Sachs & Co. He worked at Goldman Sachs from 1982-2009.

        Chris Javens

        Government: Ex-tax policy adviser to Iowa Senator Chuck Grassley.

        Goldman: Now lobbies for Goldman.

        Reuben Jeffery III

        Government: Under Secretary of State for Economic, Business, and Agricultural Affairs from 2007-2009; Chairman of the Commodity Futures Trading Commission from 2005-2007.

        Goldman: Former Managing Partner of Goldman Sachs Paris Office. Worked at Goldman Sachs from 1983-2001.

        Dan Jester

        Government: Former Treasury Advisor.

        Goldman: Former Goldman Executive.

        James Johnson

        Government: Selected to serve on Obama’s Vice Presidential section committee but stepped down.

        Goldman: Board of Director of Goldman Sachs since May 1999.

        Richard Gephardt

        Government: U.S. Representative (1977 to 2005);

        Goldman: President and CEO, Gephardt Government Affairs (since 2007). Hired by Goldman to represent its interests on issues related to TARP.

        Neel Kashkari

        Government: Interim head, Treasury’s Office of Financial Stability from October 2008-May 2009; Assistant Secretary for International Economics (confirmed in summer 2008) Special assistant to Treasury Secretary Henry Paulson from 2006-2008.

        Goldman: Vice President at Goldman Sachs from 2002-2006.

        Lori E Laudien

        Government: Former counsel for the Senate Finance Committee in 1996-1997.

        Goldman: Lobbyist for Goldman since 2005.

        Arthur Levitt

        Government: Chairman, SEC 1993-200;

        Goldman: Advisor to Goldman Sachs (June 2009- present).

        Philip Murphy

        Government: U.S. Ambassador to Germany since 2009.

        Goldman: Former Senior Director of Goldman Sachs where he worked from 1983-2006.

        Michael Paese

        Government: Top Staffer to House Financial Services Committee Chairman Barney Frank. Goldman: Director of Government Affairs/Lobbyist (2009)

        Mark Patterson

        Government: Treasury Department Chief of Staff since February 2009.

        Goldman: Lobbyist for Goldman Sachs from 2003-2008.

        Henry “Hank” Paulson

        Government: Secretary of the Treasury from March 2006 to January 2009; White House Domestic Council, serving as Staff Assistant to the President from 1972 to 1973; Staff Assistant to the Assistant Secretary of Defense at the Pentagon from 1970 to 1972.

        Goldman: Former Goldman Sachs CEO. Worked at Goldman from 1974-2006.

        Romano Prodi

        Government: Two time prime minister of Italy.

        Goldman: From March 1990 to May 1993 and when not in public office, Mr. Prodi acted as a consultant to Goldman Sachs.

        Steve Shafran

        Government: Adviser to Treasury Secretary Henry Paulson.

        Goldman: Worked at Goldman from 1993- 2000.

        Sonal Shah

        Government: Director, Office of Social Innovation and Civic Participation (April 2009); advisory board member Obama-Biden transition Project; former previously held a variety of positions in the Treasury Department from 1995 to early 2002.

        Goldman: Vice President 2004-2007.

        Faryar Shirzad

        Government: Served on the staff of the National Security Council at the White House from March 2003 -August 2006; Assistant Secretary for Import Administration at the U.S. Department of Commerce in the Bush Administration.

        Goldman: Global head of government affairs (Lobbyist) since 2006.

        Robert K. Steel

        Government: Under Secretary for Domestic Finance of the United States Treasury from 2006-08. Goldman: Former Vice Chairman of Goldman Sachs where he worked from 1976-2004.

        Adam Storch

        Government: COO of the SEC’s Enforcement Division (October 2009-present). He was 29 years old at the time of his appointment.

        Goldman: Former Vice President at Goldman Sachs where he worked from 2004-2009.

        Richard Y. Roberts

        Government: Former SEC commissioner from 1990 to 1995.

        Goldman: Now working as a principal at RR&G LLC, which was hired by Goldman to lobby on TARP.

        Robert Rubin

        Government: Treasury Secretary from 1995-1999; Chairman of the National Economic Council from 1993-1995.

        Goldman: Former Co-Chairman at Goldman Sachs where he worked from 1966-1992.

        John Thain

        Government: CEO President of NYSE (2004-07)

        Goldman: President and Co- Chief Operating Officer from 1999-2004.

        Marti Thomas

        Government: Assistant Secretary in Legal Affairs and Public Policy in 2000. Treasury Department as Deputy Assistant Secretary for Tax and Budget from 1998-1999; Executive Floor Assistant to Dick Gephardt from 1989-1998.

        Goldman: Joined Goldman as the Federal Legislative Affairs Leader from 2007-2009.

        Massimo Tononi

        Government: Italian deputy treasury chief from 2006-2008.

        Goldman: Former Partner at Goldman Sachs from 2004 – 2006.

        Malcolm Turnbull

        Government: Member of the Australian House of Representatives since 2004.

        Goldman: Chairman and Managing Director, Goldman Sachs Australia from 1997-2001 and Partner with Goldman Sachs and Co from 1998-2001.

        Sidney Weinberg

        Government: Served as Vice-Chair for FDR’s War Production Board during World War II. Goldman: Worked at Goldman from 1907-1969, eventually becoming CEO after starting as a $3-a-week janitor’s assistant.

        Kendrick Wilson

        Government: Advisor to Treasury Secretary Henry Paulson.

        Goldman: Senior investment banker at Goldman where he worked from 1998- 2008.

        Robert Zoellick

        Government: President of the World Bank since 2007.

        Goldman: Vice Chairman, International of the Goldman Sachs Group, and a Managing Director and Chairman of Goldman Sachs’ Board of International Advisors (2006-07)

  38. “The bankers benefit because they get the new money first when it is still worth more because the market hasn’t realized it yet.”

    How can you not agree/see the truth in this?

    • Because bankers create their own money; they don’t have to wait for it. So I’m not sure what the relevance of the statement is.

      • “Because bankers create their own money; they don’t have to wait for it. So I’m not sure what the relevance of the statement is.”

        Who gets the newly created money and when they get it is extremely relevant.

        The newly created money is first used by the people who created it at FULL FACE VALUE. Only when the money has lost its value does it finally end up in the hands of the people…

  39. David,

    I also enjoy Dr. Paul’s contributions. It is his contribution (and those like it) that provoke articles and blogs like yours to be created and read by the folks who are interested in these types of topics (fiscal republicans and fiscal democrats alike). Some of the comments above have stolen my thunder in discussing the Fed’s role in circulating currency, but I like to refer to it as the monetary “float”.

    It’s a term we are all somewhat familiar with and is the bread and butter of all financial institutions. Because the Fed has the ability to create currency, it must circulate through the financial system before being fully integrated into our daily lives. Call it trickle down, call it quantitative easing, call it public to private asset shifting… the fundamentals have not changed. In my view, it takes far too long for production wages to catch up to prices when more money is created and put into circulation. True efficient markets are not at full power in our current model, and it is due primarily to our paper based system. (Before anyone feels that I am an advocate of the “new world order”, please hear me out on this one.)

    The advantage of our paper based system is entirely in the favor of financial institutions. Consider how much corporate cash Wall Street is sitting on as we read this. Are we to believe that these firms are going to create a new payroll index and apply wage increases across the board? Certainly not – and even if it were to happen, that’s not a free labor market at work. Not everyone in America has earned a raise in their pay – I know I haven’t, yet I just received a raise last month.

    Real wages should be tied as closely as possible to real production. Printing more currency without the immediate exchange for increased economic production fails to fix the issue of inflation (i.e. “the float”).

    Despite our difference in view, I appreciate your thoughts and look forward to your next post.

  40. Brian,

    Thanks for your reasoned reply.

    One question: Suppose the USD did not exist, or that it was equivalent to gold (i.e., fully backed by gold). So now tell me…why wouldn’t Wall Street now not be sitting on a pile of gold instead of paper?

    We may not be as far apart on our views as you think.

    • David,

      You know that gold is produced (mined), just like any other commodity on our planet. The issue I have with Wall Street sitting on dollars, gold, cocoa beans, cotton, or diamonds is that I have yet to find any production, service, or exchange that resulted from the issuing of QE2 (and the soon to be QE3).

      For Wall Street to have reserves of gold, wheat, cotton, or whatever real commodity it chooses, those resources would have to be either gathered from the source (produced) or exchanged for other previously produced goods.

      Money is not a real commodity (in my view). It represents a belief that it can be exchanged for other goods or services. It is best represented by being backed by something real. When my U.S. dollar bill eventually fails to be accepted by a store owner, it will be deduced to exactly what it is – a single piece of paper.

      I don’t want to come off as a ‘doomer’ convinced of collapse, but certainly there is something that needs fixing in our discussion. I don’t know what exactly that is yet. Fortunately we have lots of smart guys like you and others reading this that may have a few of the answers.

      You are correct that we are closer in agreement than I have illustrated. I look forward to the next discussion!

    • David,
      Well the difference between the two scenarios is that paper money always enters the market through the banking system and so they always get the maximum benefit from the freshly created money. Gold doesn’t enter the system always from the same point but it enters the system through a market process and so there is uncertainty. The gold miner needs to take a risk and so there is a risk/reward situation whereas the paper money creation, there is no risk and always reward. I agree with you partially in that if gold production was very simple then the gold standard would fail. It is the fact that it is rare and difficult to produce which makes it valuable and useful as a currency.

  41. Your problem is clear in the words you use. When you say monetary THEORY..

    Just as there is no such thing as psychological, religious, political, or aesthetic THEORY the is no monetary theorY either.. The is however theories!PLURAL….
    What you fail to recognize (because of your indoctrination) is that the nature of money as an idea is simply not just a monolithic construct that needs centralized control an manipulation but that there are other theories (some of which have a much better track record) that see money as something else. The Fed Chairman, and so called experts like Timmy G and others limited definition of money is part of the problem. It is not just what it can purchase but it is an energy that has a powerful current Mr. Paul who predicted the crisis we are in has a much better understanding of that power because he subscribes to a different theory.
    His theory that there are always unintended consequences to intervention in the markets and that the poor and middle class always get the shaft when they let any monolithic system have a monopoly on setting rates and creating the money has been proven throughout history again and again. The question is will the democratic process work in the favor of the people or will we end up the fiat empires before us that ended in blood in the streets and total chaos? Will they be wise enough to elect a man like Ron Paul who will stop the central bankers and politicians from looting the wealth of our nation?
    It is not likely……… the powers that be have done a wonderful job of dumbing the people down and brainwashing them to think there is only one economic theory and no matter how horribly it fails or how many people have to die in wars and poverty that it is correct.
    Go to the gas pump, the grocery store, the doctor or apply to be a student and tell me there is no inflation… You people at the fed need to have your heads examined but first you will need to pull them from your southern region. If you do not you will surly end up losing them in the coming turmoil ahead if something is not done to change our fate.

  42. David Andolfatto, you wrote:

    “Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).”

    Wow, just wow! And you call Paul’s answer embarrassing? You work for the Fed and you wrote the above nonsense??? You have NO idea what you are talking about. You couldn’t be more misinformed. I mean you don’t even have a basic understanding of the correlation in wages, inflation and money neutrality.

    I’m not surprised though. You don’t know the meaning of irony either.

    You wrote: “You also said “Indeed, the data source cited by Paul is (ironically enough) the Federal Reserve Bank of St. Louis. (I’m glad he trusts us enough for some things.”

    There is nothing remotely related to irony in what you wrote.

    • Hey Ed,

      You must be kidding me, right? Is your claim that average real income is now lower than it was in 1913? I suggest you re-read what I wrote. If you don’t understand it, take it to your local college and have an econ instructor explain long run money neutrality to you.

    • Ed,

      First of all, that article you link to is not authored by Blanchard.

      Second of all, here is a quote from the article you linked to:

      The result does not challenge the weak neutrality of
      money theory; given the choice of monetary rule, a change in the
      money supply has no effect on real variables.

      So I have no idea what you are talking about. And I’m pretty sure you have no idea either.

      • David,

        Try reading the whole thing before you make wisecracks and tell other people they don’t know what they are talking about. You cherry picked one self-serving opinion from a work that contains many competing opinions.

  43. I am sure Ron Paul understands money neutrality just fine, but he rejects it. Most Austrian economists consider money to be non-neutral. Money neutrality was refuted by Mises in his Theory of Money and Credit, refuted by Nobel Laureate Friedrich Hayek in Prices and Production, refuted by Murray Rothbard in Man, Economy and State. Likewise, it was refuted by Ron Paul in The Case for Gold: A Minority Report of the U.S. Gold Commision. Even Friedman understood that money wasn’t entirely neutral because of its effect on consumer behavior and becuase it shifts investment spending to shorter term ventures. Inflation is uncertainty and decay, Ron Paul is under no illusions about that.

    • Daniel,

      There is a subtle distinction between the concept of money neutrality and money superneutrality. The former asserts that a change in the stock of money has no real consequences (at least, in the proverbial long-run, in its weaker form).

      Superneutrality asserts that the rate of inflation has no effect on real variables. There is considerably less theoretical and empirical support for this proposition. But I was not emphasizing inflation in my post. I was critiquing Paul’s apparent confusion concerning money neutrality. He seems to think that just because today’s USD has less purchasing power, that somehow, this means that today’s labor has less purchasing power than in 1913. That is plain false.

    • Ed,

      Your link now takes me to Blanchard and Kahn’s paper on how to solve linear rational expectations models.

      Thanks. But what’s your point?

  44. David,

    A very good article, which brings up some good points. I agree with Dr. Paul on the problems with the dollar, but I’m not entirely sold on all of his solutions. I’m not at all an economist, but I’ve often wondered why we can’t treat governments like people. Why can’t the assessed value of the United States back the dollar and our credit (and the same for other nations).

    If my assets are only worth so much; and I can only pay so much a month (after rent and so on); I only have so much (responsible) space to place debt. So can’t we, in a similar way, note that the U.S. is basically worth “x”, and no more than “y” in relation to “x” can be used to pay for government. Keeping also in mind that we have to dramatically change the way we utilize government.

    Also, I’ve wondered about why – when there are so many scientific principles in economics – is U.S. budgeting so arbitrary? It should be fairly clear what services need to be provided at what level of government. Whenever possible, the things that cause those expenses are taxed to pay for the expenses. (Cars need roads – taxes from oil changes, tires, parts, sales, leases and so on should pay for roads. Alcohol contributes to a significant number of community corrections cases. So alcohol is taxed whatever is necessary to cover those expenses, and so on.) I call it the Fix-It Formula. I presented it in Michigan when I ran for state office in 2006, but both my party and my opponent’s party didn’t like the idea that much.


    • Pete,


      Your first proposal essentially asks why the government cannot be restricted to issue fully-backed currency. It is a good question. But if one wants to go this route,then why not just let the private sector create the curency it needs? (A free-banking proposal). There is a lively academic debate on these questions. I wish I had the space to discuss it here.

      As for your Fix-it Forumla…heck, it makes a lot of sense to me. What were the objections?

    • The value of the US is precisely what backs the Federal Reserve Note. But ask, what exactly is that value? It is not the value of a few buildings in Washington DC, nor a bunch of national parks. The US owns some oil fields and so forth on “public land,” but that is not the principal value of the US. The bulk of the value is not real wealth that can be used for capital or consumed. Not oil or iron ore. Not food or shelter. Not clothing.

      The value of the US is that it maintains a monopoly on the use of force. It is guns and prisons, an army, and a company called the IRS. The Fed’s own web site says as much, although of course in flowery language.

      Federal Reserve Notes are not money. They are credits – stay-out-of-jail credits, redeemable every April 15, and at such other times as bureaucrats may demand.

  45. “”””””Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).”””””””

    Actually, incorrect. If was are comparing $1.00 to $20.00, then the different of percentage is 2000% value loss or 2000% of expense increase…..

    – A new HOUSE in 1921 was $7,000. In 2010, it is $182,000 (a 2593% increase)
    – A new car in 1921 was $420. In 2010 is was $12,000 (a 2857% increase)
    – Rent in 1921 was $15. In 1910 it was $900 (a 6000% increase)
    – Tuition to Harvard in 1921 was $200 per year. In 2010 it was $50,000 (a 25,000% increase)
    – A pound of coffee in 1921 was $.12-cents. In 2010 it was 4.99 (a 4158% increase)
    – A movie ticket in 1921 was $.15-cents. In 2010 it was $14.00 (a 9333% increase)

    Expenses have far outpaced the value of the dollar based on your conversion, and no, incomes have not risen in relation to the inflationary policies the Fed pushed.

    Also, it’s an open source game for Congress to fund endless project’s without having to collect taxes.

    If you spend more than you take in, how is inflation possible to avoid?

    It’s not.

  46. David,

    Thank You – Interesting article! I had never considered that there may an alternative to Keynesian Economic Theory.

    I think this Ron Paul guy is on to something. Is this the same guy that ran for POTUS in 2008?

  47. I think you need to check your statistics Mr Fed. The value of the dollar has lost 95% of its value since 1913. Also, according to your 1 to 20 figure, the dollar has gone up 2000%. Now tell me how much the average American salary has increased? The average salary in 1913 was ~$15,000. Now, it is ~$50,000. The dollar has gone up 2000%, yet wages have only increased ~333%. This is what Dr. Paul is saying… where has the 1667% gone? That would equate to goods costing 16 times more today (with inflation included).

  48. As time goes on the value of the dollar has decreased. So if you had a $20 bill for 60 years, the value of your money is reduced significantly. It is a MANDATE, by the way, for the FED to maintain the value of the dollar, to maintain full employment, etc, and the FED HAS NOT DONE THAT! Ron Paul advocates for a strong and stable dollar based on a basket of goods, not one that can be artificially controlled and manipulated. After all, interest rates held too low for too long created many bubbles, including nasdeq housing bubble etc, historic boom bust cycles. What’s wrong with sound economics? Economic responsibility?! The fed is irresponsible and has enabled so many mistakes and in the red programs. Why should banksters profit off of money creation in a system tied to debt?! The dollar isn’t supposed to be manipulated to accommodate irresponsible spending programs either!

  49. Actually, a gold standard (or any market based medium of exchange not governed by legal tender laws) would greatly mitigate the fed’s ability to tax because John q. would riot if he could perceive the gross misallocation of resources perpetuated by bureaucratic largess

  50. Technology and other increases in productive efficiency have hidden the effects of the FEDs manipulation. Today we as Americans should be able to earn everything we need to live in 20 hours per week or less. We spend the rest of the time struggling to keep a million + federal employees and millions more federally contracted employees engaged in wasteful activities (for the most part)

  51. ” . . . Moreover, keep in mind that the inflation tax is collected off of foreigners as well.)” – David Andolfatto in last line of third to last paragraph of article.

    “My post has nothing to say about inflation. I am talking about long-run differences in the price-level. There is a difference. I should have communicated it better.” – David Andolfatto in David says: March 4, 2011 at 10:59 am

    “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – Keynes

    If the electorate understood inflation then we would be in open revolt.

  52. The author of this FED apologist article fails to consider the massive debt that has gone hand in hand with the expansion of the monetary supply. It isn’t just the inflation that is bad, but also the associated debt.

  53. I am appalled how everyone here is bashing the Fed.

    You should be thankful that the Fed helps provide us with money, i.e. tokens of exchange. It is a great benefit to society whenever the Fed produces more of these scarce resources. And it’s absolutely necessary that the Fed help prop up our banks and major companies like AIG. After all, where would our capitalist economy be if these major wealth production centers were allowed to collapse?

    You should also thank the Fed for setting the interest rate. I’ll admit it’s true that services like mowing your lawn or cleaning your chimney can be set at price chosen by the market. But the service of providing loanable funds is instrinsically different. If you studied economic theory, you would know this. Only learned economists are capable of correctly fixing the price of that particular economic good.

    And unlike the greedy capitalists who just want to steal people’s money, the Fed helps society by solving econometric differential equations so as to optimize people’s utils. It is folly to rely on the greedy speculators to speed the economy to equilibrium by shrewdly investing of their own funds. I’m glad that it’s our Fed econometricists, armed with the tools of modern science and unlimited funds, who are helping to dampen the wild swings in our economy that would be there if it weren’t for them. But how can the Fed continue their successes if their ability to create fiduciary media at a whim is intefered with by meddlesome politicians like Ron Paul and their crazy economic theories?

    • i should be thankful that the fed has a monopoly on what i can use as currency?
      an inflated paper note?
      shouldn’t the market dictate what is tradeable for goods and services instead of a banking cartel?

  54. As Ron Paul once reflected on deliberate dollar inflation by the FED:

    “The most sinister of all taxes is the inflation tax and it is the most regressive. It hits the poor and the middle class. When you destroy a currency by creating money out of thin air to pay the bills, the value of the dollar goes down, and people get hit with a higher cost of living. It’s the middle class that’s being wiped out. It is most evil of all taxes.”
    Source link:

    The only people who love inflation so much are the banks because Inflation(through QE) = Debt = Interest and Profit for the banks and, as any banker knows, this profit is all achieved through fractional multipliers on deposit holdings. Thus dollar money is created out of thin air by the Fed, this is all handed to the megabanks via QE on a plate at very low interest, this money is multiplied by 10 and then lent out at much higher interest rates by the banks. Result? Huge profit out of thin air for the banks.

    Yes, I know. This is called honest banking by some.

  55. This has got to be the worst Ron Paul bashing I’ve ever heard. Is this all you got? You say you like Ron Paul, but I think your full of crap. I dare you to take Ron Paul on face to face on the FED. Your head will spin my friend.

  56. I will admit that Dr. Paul does sometimes oversimplify these matters when in what one might call “soundbite mode”- it is difficult to make a very clear, succinct statement on this matter that would actually capture everything at issue. However, if you have listened to his longer talks or read his longer literature on the subject, you know that he does not suffer from “money illusion,” but rather that his point regarding currency devaluation is that there is a disconnect between the change in the money supply, the change in prices and the change in wages, such that those whose wages adjust last are clearly hurt in the process.

  57. Mr. David Andolfatto:

    You are supporting and aiding a counterfeit operation through the use of derivatives, which has bankrupted this country and thrown more than 20 million Americans into poverty. I want to make sure that you understand these are not just men that make up the 20 million people put in poverty but it is also children, grandmothers, and mothers. Families have been destroyed. Lives have been ruined. Perhaps you got up every morning and did your job and did that job very well. However, there is no denying the fraud. Now the dollar is destabilized due to your bogus QE program and causing revolutions to spring up in the middle east. The hubris never ends. If you don’t believe in Ron Paul, then perhaps President Jackson will hit the nail on the head for you.

    “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

  58. David, how do you face yourself in the mirror each morning? Do you even admit to yourself that you’re in the business of rationalizing theft through counterfeiting?

    The entire purpose of the Fed has always been to rob the public by diluting the currency. Any other claims are nothing but propaganda.

  59. If by magic, tomorrow there were an new zero on every Federal Reserve Note, every bank account, mortgage, paycheck, and bond – every dollar price tag of any kind – then Mr. Andolfatto’s argument would be sound. No one would be the worse for it.

    But that is not how it works. The Fed does not inflate the money because – heck why not? – doing so has no effect anyway. The Fed does it because it increases the wealth of some at the expense of others. Ask any Bailout Boy. Over ninety-five cents of every real dollar indeed has been stolen. The theft has been on-going over a long period of time. The reason Americans in general are not 95% poorer is that people have continued to work and create real wealth over all those years, even as the coins in their pockets were systematically clipped at the edges, and the bits given over to bankers and the US to spend.

  60. David wrote, “[M]oney neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities.”

    Let’s restate the explanation about “larger quantities”:

    “…larger quantities…manifest themselves…not on real quantities.”

    To that the alert reader replies, “wtf does that gibberish mean?”. David wrote another comment that was foolish, but it was motived more by childishness than anything else:

    “So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!”

    Har har har. But at best that’s half the story. Paul would rob those workers of inflation, too. But according to David, inflation doesn’t really matter. And then there’s the interesting phenonmenon of some people being first in line to benefit from deposit expansion, as when the FRS starts buying up government debt. But get rid of the FRS, and government debt stops looking so attractive, esp. to those primary dealers with which the FRBNY trades government and select other securities.

    “Moreover, keep in mind that the inflation tax is collected off of foreigners as well.”

    Inflation tax, indeed. Thanks for the confession.

  61. Mr. Andolfatto,
    It is not true that Congress thought it was a good idea to create the Fed. The bill written to establish the Fed was written in secret by banking interests. It was originally called the Aldrich Plan, and when it was introduced in Congress it died a quiet death. The banking interests gussied it up, renamed it the Federal Reserve Act, and it passed by voice vote on Christmas Eve, just like the senate version of the health care bill.

    Those emergency lending facilities you refer to, thru which the Fed has remitted record revenues to the Treasury? The Fed didn’t just hand over this money to the American people out of the kindness of its cold, cold heart. The taxpayer is obligated to pay it all back, with interest. These emergency lending facilities – known as bailout money – is debt the American people did not want. Phone calls to Congress on the bailout fell into 2 categories – “No!” and “Hell, no!”

    There is a story that is not being told in the data coming out of Washington. It is the story of those over 50 who lost their jobs when the Fed debt bubble burst 2 years ago. No one will hire them. It is the story of the typical family of 4 with 2 parents and 2 children earning $60,000 a year. These families have less disposable income than a family of 4 with a single parent and 3 children earning minimum wage.

    Your blog may exist to stimulate debate, but these people are not sitting in front of their computers debating. The over 50 crowd whom no one will hire worked hard and played by the rules. They took their shot at the America dream and came up empty. These folks are the bulge of the Baby Boom. They will not pick up their fishing poles or sit and watch wrestling like the generation before them. They are used to taking action.

    They have spent what was left of their retirement money to survive until now. Their home values continue to slide. Their COBRA ran out long ago. If they have any health issues at all – most folks this age are on cholesterol meds – they can’t be insured, even for major medical. They are not eligible for Medicare until age 65. Those who are fortunate enough to have hit Medicare eligibility cannot get treated by a primary care physician anyway because none of them will take new Medicare patients. The reimbursement rates are so abysmally low it costs physicians money to take on new Medicare patients.

    The folks in this group have lots of time on their hand and lots to be mad about. This group has been kicked to the curb. They aren’t debating. They are taking action. Tea Parties all over our nation that support personal liberty and limited government are rising up against confiscatory taxes paid by those who produce, and against redistribution to those who do not. In my state alone there are over 100 independent Tea Party groups. Five states are in various stages of establishing their own currencies to compete with the fiat dollar.

    It really doesn’t matter whether there are legitimate or stupid arguments to make against the Fed or its conduct of policy. Ordinary American who know the truth are taking action. They are acting in ways that will make the Fed irrelevant.

    K Smith

  62. David,
    Basically Ron Paul’s argument boils down to the following fact:
    If the Fed can set interest rates which is nothing but the price of money then why not let the fed set the price of all other goods and services in the economy.. Obviously central economic planning does not work for goods and services and so isn’t it logical to say that it doesn’t work for money as well

  63. Gold is over 1400 an ounce. Silver is 35. Can you name one time when Bernake has been right? Maybe he is right. Lying is a crafted art. I’m sure your cronies on Wall St. love the Fed. Do yourself a favor, and do the opposite of everything the Fed says. How does the Fed like buying all the treasuries? Nobody wants them anymore. China is dumping them, and buying up Europe’s debt. The only thing left is the dollar’s reserve currency status. But don’t worry the banksters will provide a solution. Their SDR will fail too. It’s just another fiat wormhole. Soon it will all be digital. The Keynesian dream is over. The only thing left is to send them to war. Why do they always send the poor? The Fed better be afraid. The public is awake. Ron Paul 2012

  64. The “pinhead” here is, of course, the author of the article. I am a retiree, living off my savings and investments. As the value of the dollar declines, so does the value of my investments. If I have $100 in the bank and inflation is 5 percent, one year later my $100 will be worth only $95. the next year it will be worth even less. The fact that a union worker is getting a cost-of-living-allowance that allows him to keep up with inflation does me no good whatsoever.

    Printing money and devaluing the purchasing power of the dollar harms everyone – except those who are in debt (like the U.S. government), because those debts can be paid back with cheaper dollars. The rest of us suckers who work hard for decades and tried to save for old age and a rainy day are apparently expendable.

  65. The problem is that not only do wages not keep pace with the fed’s increasing of the money supply, they don’t catch up either. Some will then say we have a higher standard of living today then in 1913. That’s in spite of the fed and is the result of the remaining bits of the free market.

    Every manufacturer, every engineer, is fighting the fed’s inflation every day. Designing in cost reduction after cost reduction just to keep the price of the product the same on the shelf while profit margins DECREASE or remain the same. Why has manufacturing in large part moved to China? To keep products affordable for the customer is a big part of it. The last resort is to raise prices.

    If it wasn’t for the fed’s inflation we would have a much higher standard of living or at least higher quality products to buy for dollar.

    The biggest problem of the fed’s inflation is that it destroys savings. The money saved in 1980 is worth considerably less today. It forces people to gamble, to risk their money in a wide variety of “investments” just to break even. And then, when a person breaks even, the government taxes the “gain”. Sure, your $20 buys the same as $1 did before but the government taxes you on the $19.

  66. Paid by the federal reserve system and afraid to change…. Current decision makers and other fat pigs who feed at the farm are now boiled in their own soup.

    Squeal and fuss you must… but the federal reserve system is a corrupt monopoly that has done more harm than good, in the view of many educated pinheads,

  67. If I print $100 to buy gov bonds then I would be in prison but if ben bernanke prints $600 billion to buy gov bonds then nothing happens to him

  68. What this guys fails to understand is those $20/hour jobs he thinks are available in the US have all gone off shore. The Fed is not keeping one of it’s mandates of full employment by allow wages to inflate and watching those jobs go to less expensive workers off shore.

  69. What does Andolfatto and Bill O’Reily have in common? They label as “pinhead” anyone who does not agree with their absurd convictions.

  70. The author is misinformed or an idiot, but most likely another smear attempt on Ron Paul by funded by the rich and powerful

  71. God Bless you and your kind,David.

    You are a Hero to traders everywhere.We’ve all made so much money from your booms and busts that it feels like it is raining money.Now,when the credit is withdrawn,we will have the bust of all ages.I am prepared for that too and will profit handsomely! Sleep easy,dear friend!

  72. The ability to create and control money is the obsession that goes back to medieval times. Money created by the Fed gravitates towards the elite and well-connected and trickles down the rest of us when after it is stripped of its purchasing power(tax).

    Their are 2 problems with this article:
    1) Would your preferance be to have a metal/gold backed note or a federal reserve note when making financial decisions about protecting your family.

    2) Why no quote from Congressman’s book that you 100% agree with?

    P.S.- name calling is usually an trait of the intellectually inferioir

  73. All this printing of money is really nuts. It will soon destroy our position as the world reserve currency. It’s also adding to the problems in many other countries as inflation is driving up the cost of livings there as well. The out of control costs of food in other countries is a direct result of this policy. Does it really seem like wages in other nations are keeping up with food costs?

    Oh and yes you do have to factor in short term trends they are part of the overall equation. Deliberatly ignoring short term effects is simply a way of having your argument work out when it fact is simply doesn’t. Again simply looking at long term wages is disingenuous as well. Factor in personal and public debt and you will then have a true number to work with. You simply can’t ignore things at will and have it fly.

    • Brad, it’s very misleading to claim that “all this printing of money is really nuts”. It’s through deposit expansion, not merely by printing bank notes, that the FRS enables monetary inflation. If paper currency of $100,000 is on deposit at a bank and if the average reserve ratio is 10%, excess reserves are $90,000. By loaning out this excess, new deposits are recorded by the lenders. The money supply is increased. Those new deposits, really just bookkeeping entries, are in turn subject to the reserve ratio of 10%.

      Once these new excess reserves are loaned out, the house of cards grows higher still.

      “It [all this printing of money] will soon destroy our position as the world reserve currency.”

      Your thinking is clouded by nationalism. Destroying the FR Note would be a good outcome, for it would end much, but by not means all of the FRS’s antics, at least until Congress and the FRS intervened to est. a new paper currency. Also, the FRN is not the only currency. Coins are another, and the fact that the US Mint debases the coinage is proof that the US Mint, too, knows that the FRS causes monetary and price inflation.

      “It’s also adding to the problems in many other countries as inflation is driving up the cost of livings there as well.”

      Not well David Andolfatto’s public confession that he knows that (i) the FRS imposes an inflation tax, in which case he must also know that (ii) the FRS’s activities inflate the money supply, in which case (iii) the FRS must be failing to accomplish its own stated goal of “stable prices” and “a sound financial system”, as promised at Presumably Andolfatto is not the only VP in a “Research Division” of the FRS who knows this.


  74. This article is so messed up. Your trying to confuse people on purpose. The whole point is the value of money over time. It does not matter if your wages increase if the price of everything increases. The point is that if you earn 20 dollars by working and then save that 20 dollars for twenty years it will only be worth a fraction of the number of hours you put in to get it originally. Higher wages that are equal with higher prices only do one thing.
    Punish saves
    which encourages overconsumption, rewards gambling, and transfers money from the poor and middle class up to the elite.
    Have you looked into the youth liberty movement going on right now? I dont really think you understand the magnitude.
    We need a sustainable currency ;]

  75. Dr Paul has great points and is truthful in his beliefs. He is doing a great service for Americans out there. Shedding light on something that only a few in the know ever thought about before. He is sincere, truthful, and totally honest in his teachings. I also think he is correct when he says that without the Fed reserve we wouldn’t be allowed to be saddled with 14 TRILLION in debt today. The debt is like a GIANT ANCHOR around the tax payers necks and only looks to keep growing because the politicians except the PAULS and a few others lack the political will to do anything about it. Lastly I think his point that our money would be much stabler is correct. I could go on but I think you have the point.

  76. There are three major things wrong with the author’s argument.

    First, the cost of living (which is what he is referring to) is twice as expensive now as it was 50-60 years ago. So while there might have been a gain (in a strange sort of way) during the first 40 years, it’s all been given back (and then some) during the past 60 years. This trend will only worsen as time goes on, because the money supply is growing at the greatest rate in history (despite Fed lies to the contrary). Nor can it be slowed, because to do so will hasten the next round of recession. Salaries will no longer be able to keep up.

    Second, and more importantly, the author completely ignores what happens to savings. If you saved $1 in 1913 until 2011, you would have lost almost all of its value. Savings, by the way, is not something one puts into a bank. It’s merely money that one holds aside. So bank interest doesn’t count (and doesn’t keep up anyway!).

    Banks (and the Fed) try to argue that you should be investing this saved money in order to break even, but that’s wrong. You shouldn’t have to invest your savings in order to try to break even! Further, it turns out that most people are bad investors. Putting your money in the hands of an expert usually isn’t much better. Most people lose against monetary inflation.

    Third, an ever-increasing money supply takes away the shared benefits of free enterprise from all. A money supply should be relatively unchanging. If it was, then saving money would make sense, because its value would actually increase over time as the overall supply of goods and services constantly increases. What you’re justifying is the idea that money should lose value over time, because it makes everyone wealthy. In fact, it makes the bankers and the corporations wealthy. The rest of us lose value if we try to save the money we earn. If our money actually held its value, poverty would have been eliminated by now!

    We do not have a free market, because a free market has a stable, level, money supply. This cause is how the benefits of true free enterprise get shared with all. The debt-based monetary system we have now produces the opposite result. It makes the rich richer, while it makes the poor (and now the middle class) poorer.

    When the money supply is manipulated via fractional reserve banking (a form of legalized fraud) and Fed money creation out of thin air (what G. Edward Griffin calls the Mandrake Mechanism), the ability of a free market to share the wealth with everyone at every economic level is destroyed or severely damaged.

  77. Christ.. look at this guys background… he works for the Fed of St. Louis.. he can’t vote in this country because he’s a Canadian… and he’s a confused teacher of some sort at a university in Vancouver, BC

    There is nothing more symbolic of what is wrong with the Fed than this guy who works there, who can’t vote in a US election, and who is used as a tool of the unelected Fed and elected Congress to screw hard working American tax payers out of their hard earned money.

  78. David, come out from under your desk. The following article can be found at the authors website:

    The Ron Paul Thing
    I’ve taken down my post entitled “Ron Paul’s Money Illusion” because it seems to have provoked mindless rage rather than thoughtful debate.

    A part of this is my fault for saying that, while I respected many of the Congressman’s libertarian ideals, I thought that he could be more circumspect at times. Well, I didn’t exactly use this language, if you know what I mean. And for that, I want to apologize to the Congressman and all of his ardent supporters.

    Having said this, I stand by the substantive point that I was trying to make. That column, however, was written too hastily. So I think I’ll rewrite it, this time a little more carefully, and with a little less colorful language (and maybe a little more data).

    A good weekend to all.

  79. So what Mr. Aldolfatto says is that’s it’s OK to steal our money today via inflation, because tomorrow our salaries will be adjusted to compensate for it.
    He of course neglects to mention that the Fed steals the savings, robs those who will get these increases later, and creates bubbles, not to mention all these backroom deals Fed makes on our expense, and afraid to disclosure. So Mr. Aldolfatto is either deliberately lying, or has no clue what he is talking about. I am not sure which one is worse.

  80. David Andolfatto, you must absolutely read chapter 21 (The Monetary Policy) of Friedrich Hayek’s The Constitution of Liberty. It is only 15 pages long, a very good read, and contains all the answers you need about the issues you discuss.

    Also, you seem to forget that pension-aged people are those who suffer the most from inflation and that their income is not “money-neutral”.

    Anyway, from Hayek :

    “There are two points which cannot be stressed enough: first, it seems certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend; and second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other. Even a very moderate degree of inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out.

    We have not had space to touch on the various ways in which the efforts of individuals to protect themselves against inflation, such as sliding-scale contracts, not only tend to make the process self-accelerating but also increase the rate of inflation necessary to maintain its stimulating effect. Let us simply note, then, that inflation makes it more and more impossible for people of moderate means to provide for their old age themselves; that it discourages saving and encourages running into debt; and that, by destroying the middle class, it creates that dangerous gap between the completely propertyless and the wealthy that is so characteristic of societies which have gone through prolonged inflations and which is the source of so much tension in those societies. Perhaps even more ominous is the wider psychological effect, the spreading among the population at large of that disregard of long-range views and exclusive concern with immediate advantages which already dominate public policy.

    It is no accident that inflationary policies are generally advocated by those who want more government control–though, unfortunately not by them alone. The increased dependence of the individual upon government which inflation produces and the demand for more government action to which this leads may for the socialist be an argument in its favor. Those who wish to preserve freedom should recognize, however, that inflation is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary. For this reason, all those who wish to stop the drift toward increasing government control should concentrate their efforts on monetary policy. There is perhaps nothing more disheartening than the fact that there are still so many intelligent and informed people who in most other respects will defend freedom and yet are induced by the immediate benefits of an expansionist policy to support what, in the long run, must destroy the foundations of a free society.”

    –F. A. Hayek, The Constitution of Liberty (1960)

  81. What the writer fails to understand, is that wages have not increased 20 x from 2013, even if inflation has.The Fed does all sorts of dodgy things to create bubles,bail out foreign governments,mastermind currency attack on other countries and allow congress to build up huge debt

  82. david you are no more than a criminal harboring financial terrorist.the fed was created by special interest and you harbor this cartel.You can say all you want but at this point no one is listening to this b.s.You are traitor to american values and should be tried under the old act for devaluing the currency.

  83. Not that surprising that one of the criminal parasite class would think that anything leading to free markets is “pinheaded”. The revisionist history, blaming of the public all very worn out tactics by now. A lot of us are not falling for the scam any more. We want you gone.

  84. “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” – Alan Greenspan

  85. If some guy puts his bank notes in a matress, and in a few years it is worth less than it did when he sewed the bank notes into it, then it is the guy whos job it is to manage the bank notes that needs to be horsewhipped in public, tarred, feathered and run out of town on a rough hewn rail. I would not hire a central bank professional to run a cash drawer at a gas station, for fear that it would be short every night.
    banks, and banking? dont get me started!

  86. Money neutrality is an illusion with no provable bases. Time and time again this myth has been exposed. The more you pee in the pool, the more diluted and polluted the water becomes.

  87. I think what is intriguing is that no one from the FED discusses the nature of money, rather than the quantity. What is clear no matter your beief is that our dollar is worthless by the very people who work at the FED

    See the interview I posted some time ago in which a Fed economist( like you ) cannot define a dollar and urges people NOT to keep them.

    Fact is there is never any good that can come of a money system, only bater can eliminate our economic woes. 100% of purchasing power (productivity) bidding in the market for 100% of productivity. Under these conditions you can never have inflation.

    Your defending a deeply flawed system.

    I would urge you to read “Money: the greatest hoax on earth” by Merrill M.E. Jenkins Sr. (monetary realist) You should have no trouble following the content.

    We are all in this together, Dr. Paul deserves better than to be called names.

  88. “David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis”

    He should be enlightening us all how Fed has been bankrupting our Nation for almost a 100 years now instead of arguing HOW MUCH Fed has screwed us all…

    Way to go. Pathetic…

  89. Nice try.

    You are speaking on a Keynesian soap-box. The bottom line any way you dress it: Inflation is a hidden tax. Yes, wages increase, by they lag well behind. In 1913 one income could support a family of four — plus the family could save approximately 25% of their income. Today two incomes barely make ends meet. The Federal Reserve is a hole in the milk bucket however you analyze it.

    You are advocating a system of slavery. But you do work for the Federal Reserve, so no one can fault you for that.

  90. “So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!”

    Of course, all wealth creation in this country, and subsequent rise in real wages, is all thanks to the almighty Fed. How dare Ron Paul not bow and wave incense around images of all the Fed chairmen over the past 100 years!

    Who needs the free market when we have the Fed creating all the wealth for us? Ron Paul must be completely clueless. No chance in hell they’re working for the Wall Street banks that helped found them in 1913.

  91. David:

    Have you read Alan Greenspan’s shorty essay, titled “Gold and Economic Freedom”? He wrote it in 1966.

    If you have not read it, I highly recommend you (and all of America) do so.

  92. “At the 3:50 mark, Kudlow asks Paul: “Would oil be at $102 a barrel now if we had a sound dollar policy?” Paul’s reply is that, if Bretton Woods had not been abandoned (in 1971), oil would now be trading closer to $5 a barrel.

    I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?”

    Yes, he is very serious. Look at this chart: Oil was bouncing around $4 – $5/barrel before the Bretton Woods system broke down and was abandoned by President Nixon.

    Your second comment about whether wages would not automatically adjust downwards to that lower price level is somewhat valid, but what’s more important to remember is that wages are a function of the free market and price competition. Minimum wages, and subsequent growth in wages, result from productivity and capital creation, not at all from sound money monetary policy. In fact, I’d argue that sound money policy attempts to minimize the effect of money supply on real wages. That’s the point!

    “And, as an aside, am I the only one who chuckles whenever he berates the Fed for creating money “out of thin air?””

    You’re denying that money has never been created out of nothing? I suggest you read about the Bretton Woods system, and in particular, read about why it broke down. I also suggest you read Bernanke’s own statements on quantitative easing. Of course he’ll support its merits, but even he acknowledges that it is essentially money creation.

    “Is it not true that the Treasury also creates its debt “out of thin air?””

    You cannot create debt if you do not have: 1) assets to back the debt, and 2) debt investors willing to loan money. Debt is not an asset; its a form of capital. It cannot be created from thin air because of the aforesaid need for investors. QE, or money printing, however, requires nothing but the click of a button (okay, maybe several clicks through a number of highly encrypted computer software and technology).

    “Do you think getting rid of the Fed (which, in conducting monetary policy, is simply swapping one form of thin air for another) will prevent Congress from issuing its own thin air?””

    Yes. The gold standard, by definition, requires Congress to increase its gold reserves if it wishes to increase the money supply. This occurs as a process of organic economic growth through price competition. Too little money supply would strangle an economy; too much causes inflation and malinvestment.

    “Do you really believe that a gold standard would mitigate the government’s ability to tax?”

    No, and I don’t believe any advocate of the gold standard believes this. Not sure where you get that from. Fiscal policy is a whole different animal.

    I think you need to look into some of the scholarship of Frederic Bastiat, Ludwig von Mises, F.A. Hayek, and Jude Wanniski to better understand Ron Paul’s positions. You’ll quickly find that Paul’s economic philosophy is nothing new at all.

  93. David,

    You have some catching up to do. You’re falling behind on responses/reply ratio.

    I wish we could pull this kind of enthusiasm when times are good.

  94. This is a joke article right? No one at the Federal Reserve can really be this stupid. If this isn’t a joke and David really justifies inflation by wage increase, then I can see why all these people hate the Fed.

  95. I would say that inflation is a tangible thing per se. It is in fact fiat money ( money by decree) every time money is created non comenserate with production, one piece of inflation has been created.

    @ J. Conway….yes I read it, Greenspan was quite different in his beliefs back then.

  96. David,

    As far as a store of wealth the dollar is a horrible deal as it loses purchasing power every year. While there may be no perfect store of wealth over time the currency used should be a decent option. Since it is not people are forced to either lose money in FDIC insured accounts or place the fruit of their labor and future dreams at market risk. In fact for real people (since they have to figure in things like food and energy costs) they have to look for substantial gains to offset their loss. That is undertaking even more risk for those gains and that just assists in malinvestment (I know its something you likely don’t believe is happening on a large scale).

  97. As my Dad (god rest his soul) would say : What a bunch of horse sh** ! We are living under a criminal banking syndicate. End the FEDERAL RESERVE BANK, please, so our children have a real chance for prosperity.

  98. Lets look at it a slightly different way, my grandfather works for 100 hours in 1913 and saves his $100 in the draw. It’s now 2011 and he want’s to celebrate his 110 year birthday, but his $100 is now only worth $5 of 1913 currency. Someone has stolen $95 of his 1913 currency. Stolen 95 hours of his hard labor.

    You know what we call that?

    Theft! You sir are a Thief, who steals the value of money from everyone’s savings.

  99. what did the statist bootlicker corporate lackey clueless Keynesian academic expect when he so crassly attacks the only person in the US government who understands money and economics in general? These Fed toads live in a fantasy world where crushing the poor, financing drunk government shopaholics, giving billionaire bankers free money and financing endless wars makes total sense.This scrotumlicker doesn’t even deserve to say Ron Paul’s name.Hey, Mr Bootlicker??? So what kind of thoughtful discussion would you like to have? I’m just a guy in a grocery store and I know more about economics and money than you, at least after reading this kind of crap and the kind of crap all the Fed bootlickers spew (except maybe Hoenig.)Have you already forgotten that your boss says we have no inflation, the housing market isn’t a problem, we won’t monetize the debt, we don’t bail out foreign banks, and we have nothing but huge growth ahead of us??? ha ha ha ha – and why would anyone want to have a thoughtful discussion with morons who believe all those lies??

  100. In a reply above, David citeds the “Fisher equation”.

    Enough said.
    Anyone who cites, and thus at leats purports to believe, any of Irving Fisher’s bunk hypothesizing, has pretty much admitted to practicing the same kind of charlatanism that Fisher preached, and Keynes was able to make ivory-tower dogma.

    Those converted to this mindset will never give up their belief in it, and many who only cynically adopted it, start believing their own clap-trap eventually. No idea where David falls, but it is discredit enough to cite as he does.

  101. O man you are not helping the, “all American government officials are retarded” stigma at all. I’m in South Africa and I doubt anyone in our backward government is stupid enough to miss the logical errors in your argument. Keep up the good work your deficit makes me feel rich.

  102. Mr. Andolfatto explain to me how this works out for someone who has been a careful saver of his money and now sees the purchasing power of that money destroyed? Please explain to me how this works out for a retired person on a fixed income who sees the declining purchasing power of that income?
    Come on pin head. lets hear it? Maybe you could just print some more money?
    You have not already tried that have you?
    o wait..

    • Clearly you aren’t too bright. A saver, by definition, gets a nominal interest rate (say, from the bank), unless they are stupid enough to save their money by hiding it under a floorboard in their bedroom. I’m guessing you do that.

      That nominal interest rate contains a term for the real return and a term for expected inflation. Therefore, inflation does not reduce my real return unless it is unanticipated. Since the inflation rate in the US is stable and quite predictable, you are revealed to be an idiot.

      And Ron Paul is definitely a pinhead.

  103. OMG, I can’t IMAGINE how this nitwit got a PhD in Economics!!!! Yes, your inflationary policies are devaluing the value of the dollar. But you miss the fact that the value of SAVINGS has eroded; the cash passed from generation to generation has EVAPORATED, IDIOT, because the Fed has kept rates artificially LOW, lower, in fact, than the rate of inflation. Anyone seeking any return on their savings has had to go to the Big Casino on Wall Street, and we all know where that ended up.

    As much as you would prefer Americans to live hand-to-mouth, some of us have accumulated savings….which YOU have DESTROYED!!!

  104. I can tell this guy from the Fed never worked a day in your life. No inflation and the decline in purchasing power is no big deal? The Federal Reserve is a cancer on the American people! End it!

  105. Dear Prof. Andolfatto,

    I guess, I could think of worse scenarios on distributing money supply than the FED system, where a group of academics sit around and argue about their data at hand. BUT there is a huge flaw in the system, which has not been solved so far – and that is simply that entities which are close to the money supplier (CB), profit overwhelmingly from it at (more or less) no cost (and no risk)!

    An economy where the simple service of “money management” absorbs 30+ % of all profits generated in the economic system – is not balanced and not sustainable.

  106. David says:
    “March 4, 2011 at 1:20 pm
    What you say is simply not true. Real incomes have (on average) been growing at 2% per annum for at least 100 years. True, there has been some divergence in this growth in recent decades across different groups of society. But the generaal trend has been upward.”

    I notice you have to qualify that with “(on average)”, and “True, there has been some divergence in this growth in recent decades across different groups of society”. So basically what you are confirming is that the rich are getting richer.

    Another way of looking at this is that the rich are getting a lot richer, and the poor and lower income are getting poorer – but “on average” income is growing so you think this makes it ok? This goes back to the point that there is a wealth transfer from the lower income and people with savings to the rich and well connected. It is a crime.

  107. Since no one has bothered to point this out I will. When the federal reserve began printing banknotes in 1913 there were worth their face value, i.e. they could actually be exchanged for the number of dollars that were written on them. A dollar in case you do not know is a silver coin, go read Thomas Jefferson 1784 notes on coinage and the establishment of a money unit. He writes “A dollar is a known coin…If we determine that a dollar shall be our unit we must then say with precision what a dollar is”. I just went into the market two days ago and attempted to exchange 33 dollars in federal reserve notes for as many dollars as I could get. I was only able to afford one dollar (though I did also get a mercury dime, and a silver war nickel, as well as some debased clad coinage). David I would like it if you would actually address the issue at hand, the federal reserve notes i.e. federal reserve debt has lost over 95% of its value since the federal reserve was established. In fact the federal reserve and it’s member banks refuse to pay their debts currently outstanding while they continue to promise to pay more and more. As far as a dollar being a specific weight in gold, go reread your history the word Thaler which you mentioned had NOTHING to do with gold EVER, it was a silver coin and always has been, please check your facts and reply back when you have actually read the words of Thomas Jefferson from 1784 and you might learn a thing or two. It is truly sad that a college student in Physics has to explain this simple historical fact to a doctor of economics, please do some research and stop pretending to know what you are talking about.

  108. The FED is there to own the money supply

    – it is an instrument of private banks to allow them to issue debt money and collect interest on every $ EVER CREATED

    Note: the statement Seigniorage revenue for the U.S. is “peanuts” – this makes it seem like the Fed is only taking money for issuance of coin, what a ridiculous statemetn

    – it (the Fed) allows the govt to run in a Fascist manner, if we were to collect taxation on an individual who currently pays $10,000 in tax for all of the outlays it would cost $72,512 per individual

    The fact is this, the entire system is created to steal (through interest, through control, through inflation), to control (put into PRIVATE HANDS), and to fail (debt money is not sustainable, it always fails).

    David Andolfatto is wrong – because the only way for individuals to protect themselves is to trade out of the money supply, buy gold for example and trade back out, and trade in, if they do that they MAY not be affected. The idea money expansion effects us equally (ie wages/prices go up with money supply) is dead wrong.

    It disgusts me that we have Fascist style wards of the state calling elected officials pinheads with no fear or consequence.

  109. The Fed has never been audited. The Fed prints money to pay debt, but weakens the value. The Fed is not part of the US government. It’s a company owned by foreign banks.

  110. Mr Andolfatto seems to have gone all quiet.

    Like The Administration, some here aren’t so fooled by the Fed’s ways.

    Let’s hope he takes some of what’s been said here home for a good rethink.

    And Mr Andolfatto’s smear of Ron Paul couldn’t have backfired more really.

  111. So, printing money will increase the cost of goods, but it doesn’t matter because wages will go up the same amount: “money neutrality”…therefore everything is fine.

    If that is the case then what is the point of all this creation of extra fiat money above the increase in GDP?

    There are reasons for this and it does not make sense that it is “money neutrality” We have managed to maintain some neutrality despite of the FED not because of it. It is correct to say that there is neutrality as long as you can spend money in the present or invest it at a rate higher than the devaluation and the taxation of that invested dollar.

    But is a dollar not earned based on the understanding that is a claim on goods against the labor or goods we traded. If the currency devalues every year this agreement is no longer reliable in the future.

    Technology and productivity as managed to compensate for the devastation and poverty caused by the FED. With out inflation we would no be talking about neutralization we would enjoy low prices not because of low demand but like computers,cell phone etc that have managed to compensate the negative effect of inflation. The energy we lose compensating the dilution cause by this counterfeiting would belong to the producer instead of a class of sophisticated modern parasites promoting a economy of dependency.

    Other than Government inflation also benefits the disastrous financialization of the US economy from the so called businessman, Investment Bankers that borrow and benefit from the FED artificially low rates using tremendous and often dangerous leverage to purchase assets they hold against the depreciating money.

    The FED as been a tool of the Treasury and big Banking but especially since Alan Greenspan it as been the generator of an unparalleled financialization of the U.S. economy.

  112. Stating that wages will eventually match inflation is tautological. (Aggregrate Capital = Aggregrate Capital)…

    it’s whose hands are on the capital, which is transferred from the saver to the Fed when currency is devalued.

    Who loses wealth and who gains wealth from the devaluation? All else is a Red Herring.

  113. Its a sad commentary that this freaking pinhead teaches our youth economics. Instead of stating that 20 billion is chicken-feed perhaps he should visit the poor and those that are on fixed incomes and see first hand how his evil and immoral theories affect people. Better yet, just shut the Fed down and get rid of these infantile pawns of their bankster masters. God what a freaking joke this guy is.

  114. David, your article is a failure. Your attempt was to spark debate…Well, it appears that this is very one sided! Robbery is a crime, If I say to the theif “stop” He does! Because he paid off all the police, lawyers, and judges. I go to court for a redress of wrong, and they say the Robber is free to go…I looked stunned and want justification. I’m told, “because he stole for economic growth it O.K.”

  115. It warms my heart that most of these commenters are not buying Andolfatto’s load of … The scam is out of the bag. Fractional reserve banking is a pyramid scheme.

  116. I’ll be honest I only made it half way through the comments that’s all I could handle. I think it’s time for everybody to stop thinking they understand economics because of what was said on fox news. Well written article David.

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