Discussion: World Economy

[Pepe]

During the past few days, the possibility of a recession in the U.S. has become a topic of discussion around the world. The current situation in stock markets isn´t promising at all, and the measures taken by the FED and the U.S. government do not seem to be enough to stop the slowdown or the free fall of stock market values (at least not after the recent bad economic news). What do you think about this?

[Domius]

i personally feel that the US economy is going down the drain...

where i live in Washington, the housing market is near collapse
that could effect the national housing market because the DC metro area is so big

Also, the drop in stock values is mostly because of peoples concerns that there will be a recession...

[Eientei]

The tax rebate was a terrible idea.  Can anyone provide me with solid evidence that the whole "give citizens a tiny rebate, thus bumping up spending and stimulating the economy" plan really works in the long term?  We'll be spending borrowed money anyway.  And if the only point is to stimulate the economy in the short term, it's not an effective plan.

[kor]

The main problem with the economic situation here in America is our Monetary system. The Fiat money system is doomed to fail. We allow a privately owned Central Bank(Federal Reserve) to print our money who have no oversight. Foolish. The way the system works it only does one thing and that is create debt. Another main factor is our Foreign Policy. We spend way too much money policing the globe and it bankrupts us. Our Foreign Policy and Monetary system both need to change. We need sound money. Commodity backed, not the paper money we have now.

[Pepe]

The actual problem is that the Housing sector lost a lot of value, because of the economic bubble the speculators had created. This has made the market be unstable, thus lowering the stockholder´s confidence in economy. This is what made the stock prizes fall so much. Since they believe that their benefits will be low, they sell their stock to avoid the subsequent downfall of their stock´s market value, but this actually speed´s up the process.

 What the FED and the US government have been doing is trying to keep the expenses up, so that the industries are assured that their production will be consumed, which would make the stockholders more secure about their value and would also make them stop selling their stocks like crazy, which would hopefully stop the free fall on the main indexes. I believe that these short-term solutions are quite good to stop the recession for now, but more complex regulation should be given to the financial market if the situation is to be corrected. 

[kor]

Yes, but all of that is tied directly to our monetary policy here in the US. Ever since 1913 when the Fed took control of the money here there has been problems. They control the booms and slumps of the market.

[Pepe]

But the FED isn´t  completely to blame about the bumps in the road. They are there to correct them , not stop them. The problem is that the market has grown overconfident about "quick problem fixer" FED, and that is why they stopped analyzing the actual risks in the financial market operations.

[kor]

Not completely, but if a sound commodity based money was reintroduced the market would much more stable and the dollar would once again become the currency everyone used most.

[Pepe]

What do you mean with "sound commodity based money"?

[kor]

Gold or silver standard. Most likely a mix of both. How the dollar used to be until Nixon came along and completely stopped it. The dollar the way it is now has no true value. With a gold or silver standard it would. I'd say realistically it'd be a silver standard. Mostly because we have no more gold in the US thanks to the Fed and our government here. 

[Pepe]

I don´t think that would change anything at all. Today´s currency does have the same effects gold or silver did, with the advantage that our paper money can be more easily traded and moved from one part to another in the world. And the central banks can save the money it would cost to convert gold or silver into coins. I really don´t see how this would stop the crisis the world´s economy is going trough right now!

[kor]

No, no it does not do same thing. Under a gold or silver standard inflation is very hard to do. Without inflation the money retains it's value and cost stays low. This creates consumer confidence, which keeps the economy strong. Also under the gold and silver standard there isn't just coinage, there are gold and silver certificates. Paper money that can be exchanged for gold or silver coinage. In days of old reserve banks held gold and silver in them.

[Pepe]

In the old days there was also inflation, even though gold was used as currency. The increase in the gold mine´s production (and furthermore, the possibility of everyone being able to suddenly convert their gold into currency) affected the inflation just as today's money. If you consider that the central banks now decide when to create new money, you will see it is easier to control inflation and any other type of economical problems, by the use of it´s monetary policies to prevent them. About your gold or silver into certificates idea: it´s currently done, and it wouldn't change at all any problems: the banks could make the same operations they do now with paper money, because they turn the gold or silver into paper money.
Another problem gold and silver have is that if their reserves don´t grow with the economy (which means there isn´t enough of it for transactions), then they would necessarily be turned into paper currency to stop the problems, which would make everything be exactly as it is now.
I think that reading Adam Smith´s "The wealth of Nations" would explain this better than I possibly can right now. What I believe that is today´s problem is the lack of regulation, not the currency.

[kor]

I'm not saying there wasn't inflation back then. I'm saying it's much harder to create more and devalue the money with a gold/silver backing. Easier to control?! The Fed constantly creates inflation. It's how they make money. They print money, the value goes down, prices for consumers goes up. The Reserve(Fiat) monetary system only creates debt. They loan the money to the US Government at the cost of the dollar plus a percent based on an interest rate. It's impossible to pay the Fed back, so they print more money creating more debt, thus inflation. And in the US they do not issue Gold or silver certificates to American citizens anymore. Not since 1971 when Nixon abolished the gold standard. Also, it wouldn't be everyone's gold is now currency. You wouldn't be able to use a gold necklace as money, unless you gave it to the Dept. of the Treasury and had it become backing for the certificates they'd issue.

[Pepe]

1)The inflation in the US is around two percent. That is not a problem at all. That is pretty much normal.
2)The certificates would work exactly the same way today´s money do. The FED could create more certificates if they need too, because they can create by far more money than they have in their vaults because of the financial and banking systems.
3)How can the government repay the debt with the FED: they charge the citizens taxes, which takes money from the market and then give it back to the FED, which would actually decrease the inflation.
4)And yes, the FED  creates inflation. Anybody who can emit money does. Even the ones that emit gold as currency. The difference is that paper money is easier and cheaper to control, produce and exchange.