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Thread: Is the collapse of the dollar inevitable?

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    Is the collapse of the dollar inevitable?

    In my Critique of Mathematically Perfected Economy, Axiomatic Economics by Victor Aguilar: Critique of Montagne's Mathematically Perfected Economy, I write:

    “The basic flaw in the logic of modern socialists (Montagne, Cook, Zarlenga, etc.) is confusion between motivation and capability. ‘He’s privately controlled!’ the socialist sneers at the Federal Reserve chairman, the unspoken assumption being that, were the socialist put in charge, he would immediately open the floodgates of wealth and prosperity for us all. It would be a veritable socialistic paradise, if only the Benevolent One were given the authority to print money! But, the fact is, the Fed is in a box. If a socialist were put in charge, he would be in the same box.”

    In my Critique of Austrian Economics, Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics, I write:

    “Rothbard discusses an inevitable ‘distortion-reversion process’ but says little about how it actually plays out. Apparently forgetting his master’s regression theorem, he declares ‘the continuance of confidence in the banks is something of a psychological marvel’ (1970, p. 867).

    “Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency.

    “So we see that Mises, writing in 1949, was really the last Austrian to make much of an effort to explain or predict interest rate spikes. After that, their discussion of this issue, including Mises’ later writings, increasingly took on the tone of a morality play, with the greedy bankers getting their ‘inevitable’ comeuppance.”

    Clearly, the socialists and the Austrians are at opposite ends of the spectrum of views on inevitability. Socialists believe that the Federal Reserve can turn on a dime, veering away from economic collapse towards a socialistic paradise simply by giving the right person the chairmanship. And how would the Benevolent One accomplish this feat? According to the Debt Virus Theory, it is as simple as printing money and spending it directly into the economy, rather than buying Treasury Bills. On the other hand, the Austrians believe that a “distortion-reversion process” is inevitable. Credit expansion is unsustainable and this, apparently, is true no matter how benevolent the chairman of the Fed may be.

    Is hyperinflation the inevitable result of inflation? In America we have only had one bout with hyperinflation and, over 200 years later, the phrase “not worth a Continental” is still part of our language. “In conclusion,” I write in my Critique of Mathematically Perfected Economy, “to Montagne, Cook, Zarlenga and anyone else who claims that they can open the floodgates of prosperity by spending paper money directly into the economy, I say: ‘The Debt Virus Theory is not worth a Continental!’” Debt Virus Theorists’ followers are mostly laymen (for obvious reasons) and, when I wrote this, I fully expected any American with a passing interest in economics to be familiar with the expression, “not worth a Continental.”

    Indeed, the collapse of the Continental was inevitable because, having spent Continentals directly into the economy (mostly for soldiers’ wages), the Continental Congress had nothing in their portfolio with which they could buy them back. They were, in fact, benevolent men who had no desire to see their newly-won nation racked with hyperinflation, but they could no more recall the paper money that they had printed than Frankenstein could recall his monster.

    But surely the Federal Reserve is smarter than the Continental Congress! Until as recently as last year (2007), I would have responded to this question with a begrudging “yes.” As much as I dislike the United States having a central bank (I advocate free banking), I will admit that, by buying only Treasury Bills, the Federal Reserve has given themselves a portfolio with which they can buy back dollars in the event that inflation should threaten to turn into hyperinflation. Unless the Federal Government itself collapses – by losing a war, for instance – there will always be a market for T-Bills. Selling T-Bills for cash and destroying the cash is a painful, recession-inducing process, as evidenced by our experience during Reagan’s first term, but it can be done. Contra Rothbard, hyperinflation is not inevitable under a central bank.

    So what has Ben Bernanke done to make me question his intelligence, if not his benevolence? He polluted the Fed’s portfolio with AAA-rated securities, which I have mocked as being “about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22.” Everybody knows that, in spite of their impressive-sounding AAA rating, these securities are really just packages of sub-prime loans that nobody wants – what I defined in my Devil’s Dictionary of Economics, Axiomatic Economics by Victor Aguilar: The Devil’s Dictionary of Economics, as “worthless crap.” If people wanted them, in the sense of being willing to pay cash for them, then we wouldn’t be having a credit crisis in the first place.

    Bernanke’s actions have made the question of hyperinflation a murky one. The Austrian’s depiction of hyperinflation as being the inevitable fate of central banking has always been cartoonishly simplistic, and it remains so. However, economists of all schools must now admit that hyperinflation is at least a possibility. If the dollar appears to be losing its status as the world’s reserve currency, what will the Fed do about it? Sell their AAA-rated securities for cash and destroy the cash? But what if nobody is impressed with the AAA rating and won’t buy their securities at any price? Then the Fed will be in the same position as the Continental Congress: Benevolent men who have no desire to see their beloved nation racked with hyperinflation, but who have no more ability to recall the paper money that they have printed than Frankenstein had to recall his monster.

    Of course, not all of the Fed’s portfolio is in AAA-rated securities and not everything with an AAA rating is worthless crap. They still have lots of T-Bills and there is a market for at least some of their AAA-rated securities. This is why the question of hyperinflation has become so murky. The bottom line is that nobody – not even Ben Bernanke – really knows what the Fed’s portfolio is worth these days. For this reason, I would be very leery of any economist, from any school, who speaks confidently about the future of the dollar. Is the collapse of the dollar inevitable, as the Austrians claim? Or are we at the dawn of a socialistic paradise, provided only that we install the Benevolent One in the Federal Reserve’s chair, as the Debt Virus Theorists claim? The answer is certainly somewhere between these extremes, but where exactly I cannot tell you.

    Source: Axiomatic Economics by Victor Aguilar: Gold Does Not Have Intrinsic Value

    References

    Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge

    Rothbard, Murray N. [1962] 1970. Man, Economy and State. Los Angeles, CA: Nash Publishing

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Onion Eater View Post
    References

    Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge

    Rothbard, Murray N. [1962] 1970. Man, Economy and State. Los Angeles, CA: Nash Publishing
    Extensive references then! Any chance of something from the American Economic Review, Economic Journal or Journal of Economic Literature? Just for the crack

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Scucca View Post
    Extensive references then! Any chance of something from the American Economic Review, Economic Journal or Journal of Economic Literature? Just for the crack
    I'm rebutting the Austrians' claim that the collapse of the dollar is "inevitable." So, of course, I reference their literature. If I did not reference their own literature, they would claim that I was attacking a straw man.

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    Re: Is the collapse of the dollar inevitable?

    You had a reference section without any substantial references. Come on, put some effort in it

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Scucca View Post
    You had a reference section without any substantial references. Come on, put some effort in it
    Garrison's Time and Money and Rothbard's Man, Economy and State are substantial... They are substantial to an Austrian! And it is Austrians to whom this paper is directed. There are a TON of people on this and on other forums who claim that the collapse of the dollar is inevitable. While not all of them formally claim to be Austrians, it is clear (at least to me) that it is the Austrians, particularly those associated with the Mises Institute, who are the driving force behind all the inevitable-collapse talk.

    Obviously, you are not an Austrian. Good for you! I'm not either. But Garrison is the modern leader of the Austrians and Rothbard was their previous leader. The two books that I cited are their primary works - their magnum opuses - so it is not accurate to say that these references are insubstantial to the audience whom I am addressing.

    Regarding my scholarship, I should point out that the several links on my homepage, Axiomatic Theory of Economics by Victor Aguilar: Home, have little cap-and-mortarboard symbols after them to denote their level of difficulty. This being the internet, I have tried to provide something for everyone, from laymen to professors. Gold Does Not Have Intrinsic Value is one of the laymen-level papers.

    My 2004 paper, Critique of Austrian Economics, is intended for upper-division and grad-school economics students. It has over fifty references: Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics

    No offense, Scucca, but perhaps you are the one who should put some effort into reading my academic works before commenting on my scholarship.

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Onion Eater View Post
    No offense, Scucca, but perhaps you are the one who should put some effort into reading my academic works before commenting on my scholarship.
    An undergrad would be failed with a 2 list reference. However, I take no "offense" from your failure to respond to my hopes. You have your needs and that obviously does not encompass genuine academic critique. Each to their own I say! Cheers

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Scucca View Post
    An undergrad would be failed with a 2 list reference. However, I take no "offense" from your failure to respond to my hopes. You have your needs and that obviously does not encompass genuine academic critique. Each to their own I say! Cheers
    I didn't realize this was http://www.writeathoroughlyreferencedtermpaper.com

    Why don't you try addressing the substance of his argument rather than merely attacking his merely adequate referencing?
    People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by RightinNYC View Post
    Why don't you try addressing the substance of his argument rather than merely attacking his merely adequate referencing?
    He's made a big deal of his reference section (in the fake attempt to suggest academic level thought has gone into it).

    I'm happy for folk to rant. Its our basic right. We just shouldn't hide from that reality.

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by Scucca View Post
    He's made a big deal of his reference section (in the fake attempt to suggest academic level thought has gone into it).

    I'm happy for folk to rant. Its our basic right. We just shouldn't hide from that reality.
    Again, rather than touting your familiarity with pseudo-intellectual thought, why don't you add something to the discussion?
    People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.

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    Re: Is the collapse of the dollar inevitable?

    Quote Originally Posted by RightinNYC View Post
    Again, rather than touting your familiarity with pseudo-intellectual thought, why don't you add something to the discussion?
    Its actually through him coming clean over the references that a discussion would be enabled. Rant always has its place, but I'm always up for genuine economic comment. That must refer to the material available, given we lowly swine are not capable of original theoretical thought

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