The Federal Reserve should be abolished
Pro introduces his/her arguments in the first round and waives the final round.
Up to 72 hours to respond and up to 10,000 characters.
Federal Reserve"s Mission
The mission statement from the Federal Reserve"s website,
The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
The Fed has a government mandated monopoly on money distribution and creation of money from nothing, money created without even a paper requirement.
In the mission statement, starting with "to provide the nation " a monetary and financial system", this is simply not a legitimate role of government. A government can only perform as an extension of a person. A person cannot mandate non-consenting persons the use of a monetary or financial system. People have a natural right to use anything for currency that both parties in a transaction agree to, along with banks should be able to denominate an account in any currency that can be agreed upon. Yet, both are in violation of US laws.
Now, breaking the mission statement into pieces about what the Fed roles in the nation"s monetary and financial system:
1) "Safer" How can the Fed provide America with a safer financial system? This is a reference to the 1907 panic, where major banks in New York and Chicago were allowed by the government to suspend specie payments, thus causing further deterioration of confidence in the banking system. In a sound money system species payments are key to maintaining confidence, as long as people can receive gold for their money confident will remain. Part of the Feds creation is to take control of money issuance from banks, transferring that ability to the Fed. Now, when bankers make mistakes, their first defense is that all regulation have been complied with, giving bankers the ability to hide behind regulators.
Setting bank reserve requirements are also thought of as creating safety. The highest reserve requirement for a bank is only 10%! That means if a person deposits $100 in a bank, $90 dollars are available for leading, this puts a claim on the same property by two people. With thousands of customers and most money only being number on a computer the accounting can work. For those situations when the accounting is troublesome, the Fed is the lender of last resort. Looking at factional reserve banking in closer detail, a deposit of $100 creates total assets of $190, on just one deposit. If a non-banker did the same action, it would lead to counterfeiting or fraud charges. Also, fractional reserve banking inflates the money supply.
2) "More Flexible" " Why would a financial system need flexibility? Flexibility is needed for monetary inflation. Every banker loves in inflation! Bankers have always attempted to inflate currencies, mainly through debasement (creating coinage with less gold or silver content), but mostly by just printing more currency and stating that there was gold backing that currency. Again, the Panic of 1907 was caused by lack of gold backing of currency, or as bankers would say, a lack of flexibility.
Today, that flexibility is demonstrated by increasing the money supply with quantitative easing, or QE. From Investopedia, "Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity", that sounds harmless. This flooding of capital inflates the money supply, causing every current dollar to have less value. Inflation is big profits for bankers and the first users (most connected to bankers, the rich) of this newly created money. Everyone else just accepts inflation as the way it is.
Inflation as a term has been deliberately misused to confuse. Inflation of a money supply is different than inflation of increase of the level of prices, which is only compounded by methods the Fed uses to measure inflation. The St Louis Fed maintain a database on the Fed current money supply then uses the Consumer Price Index (a problematic index that favors government, http://www.forbes.com...) compiled by BLS to measure the nation"s price level. Using inflation to describe both terms is inaccurate. For this point on inflation will only be used in terms of the money supply, with price level being self-explanatory. With these terms separated, monetary inflation needs a method of measurement so that the effects can be calculated since the value of each dollar is reduced with the creation of another dollar. Thus, the St Louis Fed"s money supply data is the monetary could be used to calculate an inflation rate.
3) "More Stable" What is a stable monetary system? Most would state a system with continuous growth with no peaks or troughs, just slow continuous growth. For stability to be demonstrated a measure must be designed, that measure is Gross Domestic Product (GDP). GDP is the value of all final goods and services purchased in America during a given time period. A slow growing GDP is desired by those in governmental power, yet means nothing to a business"s bottom line. GDP also requires goods to change hands to be measured, which encourages Fed policies to get consumption up, and saving down, lowering real wealth of people.
Money for most of history was defined as "a store of value". The store of value is still in antiquated text books, but not in the minds of elite intellectuals or politicians.
P1) Federal Reserve punishes innocent people
Starting with a hypothetical business, the leadership has a plan where they see future prices of input, transformation process and predicted sales volume to be at a level that competitors will be outpaced. This company is set to provide voluntary consumers a desired produce, therefore making a mountain of profits. This plan takes work better than expected and other companies in other industries have done the same. Then, in comes the Fed! Statements that includes words like "overheating", "inflation", "rising prices", and "low unemployment", are starting to be used. The Fed must take action to slow down this economic activity. Thus, the Fed raises discount interest rate, with an expectation of slowing this successful business down. This successful business has been selected for punishment for serving their fellow man too well This is extremely immoral.
Next hypothetical, a soon to retire couple that has worked and saved their entire life, they have a large retirement fund saved. They have calculated that at today"s prices they should be able to live for many years. The problem is that the couple does not trust banks and stores their money in an alternate safe place. Others throughout the country also are doing the same thing, which is lowering GDP, since too many people are saving or hording cash. In comes the Fed! The Fed lowers interest rates to discourage people from saving money in banks, and uses QE to inflate the currency thus reduces the value of every dollar that the innocent couple has stored in a safe place. Therefore, this couple is financially punished for doing nothing wrong. This is extremely immoral.
Using monetary policy to favor the most politically connected, which is the financial industry, and punishes the rest of a country"s citizens, can only be immoral.
P2) Federal Reserve rewards irresponsible
Back to the first hypothetical, many competitors to the success business react poorly to the higher interest rates. These poorly ran businesses are now laying off people and businesses in other fields are doing the same. In comes the Fed! The Fed now lowers interest rates to save the jobs in these poorly ran businesses. This too is extremely immoral.
The second hypothetical, QE has been successful, and influenced this innocent couple to invest their money in the financial system. Now, rich bankers have this money and only need to have 10% in reserve creating a situation where two people have a claim on the same property. This is another example extreme immorality.
P3) Federal Reserve distorts markets
By not letting markets set a natural interest rate, based on market forces the market for money is distorted. This is only a small part, the continued devaluation of US money effects every market. When the value of currency is continually decreasing people must put wealth at risk just to maintain their current wealth. This motivates people to take more risks than they normally would accept. If a person could store money in a mattress knowing that these dollars would still have the same value in the future, financial markets would be much different. Forcing people onto more risk than they desire is extremely immoral.
P4) Macroeconomics should be treated as astrology!
If astronomy is a science which is the studies of celestial objects, and Astrology a pseudo-science based on a premise that there is a relationship between astronomical phenomena and events in the human world, therefore macroeconomics is the astrology of microeconomics. Get a room full of macro economist, give them moon cyclic and Jupiter red spot data, they will have a theory on how they are correlated and the policy the Fed needs to enact to stabilize the correlation.
Measures like GDP, CPI, and Unemployment, are meaningless. The decisions that affect a person"s life should be made by that person, not some distance bureaucrat attempting to move a meaningless number. Government"s role is to protect negative rights not to ensure a stable economy. By insuring stability, innocent people are be punished.
I forgot to post this in the first round, but I wanted both our first round to just be opening statements, so for that reason I won't conduct rebutuls to Pro's claim until the next round.
The Fed has the ability to control interest rates. This helps the Fed end recessions, keep inflation low, and soften the bursting of economic bubbles (or even prevent them).
In the early 1990s the United States was in a recession. However, the Fed cut interest rates from above 8% to 5% in 1992. (1)
This brought the American economy out of recession and eventually led to surging economic growth and rapidly decreasing unemployment rates. (1) The Fed also helped growth rate continue in 1998, when they cut interest rates to 4.75% to counter the Asian financial crisis. This helped keep the American economy strong to prevent a global economic crisis, specifically leading to an abundance of Internet start-ups. (1, 3) Lower interest rates allow the economy to grow because people are more encouraged to spend, because there is less interest on savings and less interest on adjustable mortgage payments (which means people have more disposable income) and they can borrow money to invest for cheaper. Overall:
P1) Lower interest rates increase spending and investment in the economy.
During the American economic growth in the 1990s, inflation rates stayed stable.
This was because whenever inflation rose, interest rates were raised more. (5) Higher interest rates prevent inflation because there is less spending/investment, so prices are less, and therefore inflation is less.
Raising interest rates also presents the benefit of preventing asset bubbles. This is because with low interest rates speculation occurs. This was displayed in the formation of the Japanese Asset Price Bubble. Japan already had a huge surplus in their banks and when the Bank of Japan (BoJ) further lowered interest rates the stock market and real estate inflated. (6, 7)
By the time the BoJ finally did raise interest rates, the bubble was too large and stock and real estate markets collapsed.
Overall, the Fed’s ability to control interest rates is important, because it gives them the abilities to end and prevent recessions and control inflation. Due to this, if the Fed was abolished the US economy would suffer.
The Fed aims for a 2% increase in inflation over the medium term, which helps prevent deflation. (8)
Deflation can be really bad for the economy, as illustrated during the Lost Decade in Japan. After the stock market crashed, the BoJ tried to lower interest rates to near 0%. However, people and companies were still reluctant to spend and invest, partly due to the debt many companies amassed during the 1980s. (9) This is the main reason Japan had very little economic growth in the 1990s. Overall:
P1) The value of debt on companies and people increases.
This is important, because without a safe amount of inflation to prevent deflation, the economy would be in serious trouble. Therefore, the Fed should not be abolished to help prevent too much inflation or deflation.
C3-Bank Supervision and Regulation
The Fed also plays the role of supervising and regulating the banks. (10) Ever since the recent Financial Crisis, the Fed has been conducting “stress tests”. This is where the Fed examines bank’s credit, market, and liquidity risk. (11) This was in result to the recent financial crisis, where many banks were underfunded. Overall, by ensuring banks have enough capital (or by giving tips of how to increase capital), the economy is safer from banks not having enough in reserves. The Fed also ensures that banks give fair and equitable services to their communities. (12) This is done by ensuring banks keep at least 10% of their deposits in reserves. The Fed also examines whether banks make good investments, including only giving loans to people based on their ability to pay them back (which the lack of, was a primary reason for the financial crisis). (12) The importance of bank regulation can be seen by the performance of Canadian banks during the recent financial crisis. Canadian banks were much more regulated than American banks in 2008. Canadian banks had less leverage than American banks (resulting in more money in reserve), didn’t give mortgages to people unlikely to pay them back, and it overall involves a lot less risk. (13) The safer banks are, the less likely they are to face crisis, and therefore the safer people’s money are. Even though the Fed’s regulation is not at Canada’s level of regulation, abolishing it would just cause more bank failures and more people losing their money. The lack of a Central Bank has already shown banks do this, such as when the Second Bank of the United States was shutdown. Banks began lowering their lending standards and keeping a relatively less amount of money in reserve. (14) For the sake of keeping the banking system stable, the Federal Reserve should not be abolished.
Rebuttal: C1-Interest Rates
This claim illustrates many of Pro"s positions: P1) Federal Reserve punishes innocent people, P2) Federal Reserve rewards irresponsibility and P3) Federal Reserve distorts markets.
The Fed setting interest rates at artificial levels is part of the immorality of its actions. An interest rate set at an artificially level distorts the market for future money; an interest rate is simply the price of future money. This market price for future coordinates current consumption with future consumption (www.nomadpress.com/gunning/subjecti/workpape/neogrowt.pdf ). With the market for money distorted, businesses in many industries have now coordinated future failure. With failure coordinated, a downturn in one becomes a downturn for many, in other words a recession.
Con demonstrates this in the following statement ""when they cut interest rates to 4.75% to counter the Asian financial crisis. This helped keep the American economy strong to prevent a global economic crisis, specifically leading to an abundance of Internet start-ups."
Many of these Dotcom companies had no income, assets, or even a product. These companies attracted investors that could borrow money at a lower interest rate than rate of return. A profitable situation until the Fed funded bubble was shown to be fraudulent (http://time.com...).
Pro continues to illustrate the Fed"s interest rate immorality:
"P1) Lower interest rates increase spending and investment in the economy."
Coordinating misallocation of resources
"P2) As spending increases, businesses become richer, and can hire more workers and pay existing workers more."
This spending is based on false forecasts of future consumption that is spread across many industries thus coordinating business failures.
"P3) Richer people can spend more."
Those with political connections would be a better description.
"C) Lowering interest rates allows economic growth and less unemployment rates."
Lower interest rate coordinates un-productive investments, causing recessions as measured in macro-economic terms.
Rebuttal: C2-Inflation Targeting
This claim also illustrates many of Pro"s positions: P1) Federal Reserve punishes innocent people, P2) Federal Reserve rewards irresponsibility and P3) Federal Reserve distorts markets.
"The Fed aims for a 2% increase in inflation over the medium term, which helps prevent deflation."
Deliberate currency inflation is immoral, by directly reducing wealth of individuals. Looking at the targeted 2% rate, if today $1 can purchase 100 widgets, next year with everything else equal, that same $1 will only purchase 98! The holder of that $1 did nothing but was punished for holding that $1 for a year by 2 widgets. If Janet Yellen broke into a house stealing 2 widgets the police would have her in cuffs. Yet, defined as inflation it is not a crime, just another example of the Fed"s immorality.
Deflation, the macro economist"s bogey man, striking fear to their core, causing underwear changing at the Fed, looking at a blog post by a modern macro oracle, Paul Krugman, on the reasons to fear deflation, (http://krugman.blogs.nytimes.com...)
-First, "when people expect falling prices, they become less willing to spend, and in particular less willing to borrow." This is treating deflation as falling prices. People are always looking for a better price; it is part of the supply and demand model. When a price decreases, people purchase more of a good, not less. In borrowing money, having less debt is good for people. Yet, to macro economists both ideas reduce GDP, a measure with no relevance.
-Second, Krugman continues "even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts." This changes deflation to the value of currency. If currency is gaining value, it makes it harder for people that borrowed money to pay this money back. Thinking about this, and asking "who owns the most money?" that would be the US government. Currency deflation would make it harder for the government to pay interest on nation debt, and make future borrowing more expensive.
-Third, Krugman states, "in a deflationary economy, wages as well as prices often have to fall", that is exactly how markets function. Wages are the price of labor. Wages function as any other price and will reach a peaceful equilibrium.
Yet, Krugman leaves out the real reason of macroeconomic fear, falling prices render Fed policy tools ineffective. By macroeconomic definitions an economy is in recession if GDP decreases for two quarters, with failing prices nominal GDP will also decrease, (since the ruler now has deferent markings). With a mythical economic measurement falling few politicians have the leadership ability to say, "This is a good thing." Terms like liquidity trap and secular stagnation are invented to describe a fictional problem.
Currency deflation increases the value of a currency, thus a person"s purchasing power is increased by only keeping cash in a mattress.
Decreasing prices encourage consumption at a lower price which is good for consumers; nobody complains that they spent too little on a product.
Currency deflation equals liberty!
"P1) The value of debt on companies and people increases."
Thus, encourages real wealth building, nobody has ever said "wow, I have too much money in my savings account, earning a good interest rate."
"P2) Companies and people are less likely to spend/invest."
"P3) Companies are making fewer profits."
In nominal terms, no change in real terms.
"P4) Companies are forced to lay off and decrease wages for workers."
False, there is not causation. Any example provided, will demonstrate that unemployment caused failing prices, not the failing prices.
"P5) People save their money more."
"C) Deflation is dangerous to the economy and lowers consumption."
Deflation is a good thing, and increases real wealth!
Rebuttal: C3-Bank Supervision and Regulation
Bank supervision is required due to the Fed"s policies of fractional reserve banking. A Fractional reserve banking system is inherently unstable thus requiring supervision and regulation, which an inventive banker will always find a loop-hole or mouse-hole to exploit for personal gain (http://www.newleftproject.org...). If the misconduct in the 2008 Financial Crisis was so wide spread, but only one big banker has been jailed (http://www.nytimes.com...). This can only mean that most banks were fully compliant with banking regulations.
The Federal Reserved created this immoral banking system that requires heavy regulation, in order to function.
Pro commends Con for an excellent job, illustrating Pro's premises of the Federal Reserve's immorality, thus unless Con is actually for punishing innocent people, rewarding irresponsibility, and/or distorting markets (Pro can not see how ethical person could be for any of those positions) is also for abolishment of the Federal Reserve.
I had to rush this argument due to time restraints, so sorry if it seems rushed.
I’m going to start off by addressing Pro’s claim of the Fed slowing successful businesses down by raising interest rates. Since 1990, the only times interest rates have significantly been raised were after stable economic growth began in the 1990s at the end of the early 1990s recession, to lessen the burst of the dot-com bubble, and the housing bubble. They are also expected to rise again once economic growth stabilizes again after the 2008 recession:
In Pro’s example it sounds as if a bubble was forming. The bursting of bubbles are only made worse if businesses are benefiting off relatively low interest rates. If the interest rates are raised and economic growth continues at a fairly fast rate (like when they were rose in the early 90s) then the economic growth was not forming a bubble. Pro then mentions companies that are facing hard economic times, so the Fed lowers interest rates. As already shown lowering interest rates can end many recessions. Even if this is “rewarding irresponsibility” it is necessary for the economy to function. The economy is intertwined. Simply, as companies hire people who take their salaries and purchase things so other companies can hire people. Therefore, a strong economy is needed for businesses as a whole to be successful.
Pro then creates an example of families not keeping their money in banks, so the Fed lowers interest and undergoes QE. For the same reason as above, people need to spend or get investment/loans from banks to keep the economy functioning.
Pro blames the Fed for forming the Dotcom bubble. Although the Fed is not the only factor, it obviously was one due to low interest rates. However, since the global economy is intertwined, specifically through trade, if the economy didn’t get to benefit from low interest rates, the Asian Financial Crisis could have had a negative effect in America. An example of other countries suffering from one country’s economic problems was when other countries such as Canada and the UK suffered from the collapse of the New York Stock Exchange. Also, since the Fed raised interest rates prior to the bubble bursting the recession from the burst of the Dotcom Bubble were really minor and other factors such as 9/11 helped cause it. (5)
Finally, Pro seems to think that lower interest rates will eventually lead to an economic downturn. In certain cases this is true, but Pro ignores the facts interests rate were typically dropped when the economy was already in a recession and the economy was not acting at its full capacity. Therefore, the Fed is needed to help stimulate and prevent overheating of the economy.
Pro asserts that inflation is forcing people onto more risk than they desire and therefore is immoral. However, one does not have to keep their savings in dollars. For example, many people suggest gold as an alternative to fiat money and as a safe investment. The problem is, keeping savings in gold is not necessarily any better than dollars. In 2011 gold reached $1889.70 per ounce, but today (5/3/15) gold is at $1174.50 per ounce.
Relative to the Dollar, gold has lost approximately 38% of his value from its 5 year high. Therefore, keeping one’s money in dollars should not be seen as, nor is it, a large risk.
Pro also asserts that inflation is theft. Although the purchasing power of a dollar has decreased, that is meaningless without context. In 1950 a pound of butter cost $0.74 and in 1990 it cost $2.10. Clearly, inflation occurred. However, the average yearly income of all industries was $3180 in 1950 and $23602 in 1990. (2) So, the average person in 1950 could purchase 4297lbs of butter annually, but the average person in 1990 could purchase 11239lbs of butter annually. Therefore, on balance, inflation should not be classified as theft.
Pro then asserts that deflation is a good thing. Although in some industries it occurs naturally and occasional deflation is bound to happen, on balance deflation is very dangerous. First off, Krugman said when people expect falling prices, they’re less willing to spend or borrow. This is obvious, because if people think things will be cheaper in the future, they will wait for the future. This is observed every year after Christmas. Many stores have markdowns after Christmas, so people want to take advantage of the product that just underwent deflation. Pro also assert that having less debt is good for people. That is obvious, but one of the biggest reason people have a problem with deflation is because it raises the value of debt on individuals. This was Krugman’s second point that Pro provided. If dollars are worth more, then obviously debt, which is in dollars, will be worth more. Pro doesn’t even deny this when addressing Krugman’s point. Instead, he says that it makes it harder for the US government to pay back interest on its debt and make future borrowing more expensive. This actually helps prove my point. The US government gets it money from tax payers and spends its money primarily on services which employ people. Therefore, in order to keep up with interest programs would need to be cut or taxes raised, both which hurt the economy. However, that is not even the main way deflation hurts people. As can be seen, many American households are in debt. (3)
With all this debt suddenly increasing in value, it makes it harder for them to pay back their debt and will lead to less spending in the economy.
Finally, to address Pro’s rebuttals to my previous arguments.
P1-Pro asserts that if the value of debt increases, it encourages “real wealth building”. That doesn’t mean anything. Also, Pro mentions that during deflation money in saving accounts is earning a good interest rate. This still doesn’t address what I said in this premise and it is not even true during major deflation. A nation’s central bank will drop interest rates during deflation to encourage spending, in the case of Japan to near 0%.
P2-Only rebuttal here is “See P1”, so nothing else needs to be said for this.
P3/P4-Profits are decreasing in total because there is less spending in the economy, as discussed above. This causes layoffs and/or decreased wages because by observing the deflation cycle:
We can see that less spending in businesses will lead to unemployment. I’ve already discussed reasons why deflation would lead to less spending above.
C3-Bank Supervision and Regulation
I won’t go into why fractional reserve banking is necessary, but instead say that it exists without a central bank (since that was Pro's rebuttals). For example, after the Second Bank of the United States closed, banks began keeping less in reserves. This was cited in my previous round.
Con has refused to directly address the issue of Federal Reserves immorality.
R1-Fed Punishes Innocent People/R2-Fed Rewards Irresponsibility/C1-Interest Rates
Con"s argument is that since the economy is intertwined, innocent must be punished and the irresponsible rewarded. The interests of the few that control the economy outweigh the rest, con"s words "Even if this is "rewarding irresponsibility" it is necessary for the economy to function. The economy is intertwined. Simply, as companies hire people who take their salaries and purchase things so other companies can hire people. Therefore, a strong economy is needed for businesses as a whole to be successful." Then the question becomes, AT WHAT COST? To individuals as well as America's future.
R3-Fed Distorts Markets/C2-Inflation Targeting:
Con asserts that "one does not have to keep their savings in dollars", yes once does, a US bank account must be denominated in US dollars and businesses must accept US dollars http://www.federalreserve.gov... . Then, uses an example of a commodity, gold as an alternative method to lose real wealth, a commodity"s price can be affected by a great number of factors, which should not apply to money. Part of the definition of money, at one time, included "a store of value" but with Fed policies that is no longer true http://www.shmoop.com... . If the gold had been denominated in Swiss Francs the holder would have only lost 14% of value (2011 @ 1317.3, Apr 2015 @ 1127.22) https://ycharts.com... . For a person to maintain wealth they must risk their wealth at a greater level. A people should not need knowledge about commodities or other markets just to maintain their stored value. A dollar today should have the same purchasing power 10 years from now.
Looking at the butter example (using the same questionable State Department site), one dollar in 1950 would purchase 1.35 lbs of butter then in 1990 one dollar would purchase .48 lbs of butter. A dollar has lost a lot of purchasing power, or factors in supply and demand have forced the price of butter higher.
Delayed Purchases: Con"s Christmas example does not support the assertion, but better supports Pro"s view. Stepping back to microeconomics, when a supplier and a purchaser reach a voluntary price agreement, a product is sold. If a producer received incorrect market signals and over-produced a product that product will fall in price, thus an after-Christmas sale.
Time preference voids delayed purchases assertion, using a laptop computer as an example. Every one of us know, that any computer purchased will drop in price in just a few months, yet computers are still sold. We still purchase a laptop due to our desire to have a computer now verses a few months from now.
Debt repayment: Savers and borrows should be the groups that set interest rates, not central bankers. When a market sets the rate, everyone can select the level of participation. Yet, when governmental central bankers set rates to benefit government policies, central bankers show thier lack of independence, and are focused on governmental priorities. The statement by Con has some questionable morals "The US government gets it money from tax payers and spends its money primarily on services which employ people. Therefore, in order to keep up with interest programs would need to be cut or taxes raised, both which hurt the economy." Government taking money, by force from one person and giving it to another, then telling the victim we did it for your own betterment is laughable, but better described as despotism.
Currency deflation does have losers, people that have piled up large debts to please their overlords, will feel some pain when the Fed is abolished. A currency with more purchasing power, which is set by markets and individuals, provides the most freedom. There are many solutions that could reduce this Fed caused pain. The next debate can be "Options after the Fed is dead".
Pro"s view of deflation is extremely biased toward central control of the economy. The central planner's view of deflation, assumes that deflation is is triggeredby lack of demand with the cause being layoffs and wage reduction. Let"s look at another view of deflation https://www.aeaweb.org....
The diagram below displays each step supported by microeconomics.
As taught in day two of every microeconomics class and forgot by macro-economists, a Production Possibilities Frontier or PPF and explained here, https://www.khanacademy.org... . Innovation or capital accumulation is how a PPF is moved to the right, thus expanded. Using this as a starting point, an innovation causes products to decrease in cost, allowing sellers to reduce price. This reduced price has many effects, frees capital for either additional consumption or additional savings, and this lower price is modeled on every supply/demand model. https://www.khanacademy.org....
When a price falls the producer surplus is reduced and a market is out of equilibrium. Creating both a shortage and reduced producer surplus, these conditions motivate producers to expand their PPF. To expand their PPF additional capital is required. This capital is provided by the consumers that saved money due to lower prices, coordinated by a natural interest rate, which sets a price for loanable funds, not a central banker. With innovation, the supply curve shifts to the right reaching a new equilibrium.
The above cycle also demonstrates "real wealth building" that is building wealth will capital accumulation and innovation. The Federal Reserve"s system encourages an economy of debt, not wealth. The Federal Reserve"s banking regulations and monetary policy requires debt to create currency, in this system, no debt, equals no currency http://upload.wikimedia.org.... The Federal Reserve System perpetuates this system of debt as an economy.
To directly address Con"s statement "I said in this premise and it is not even true during major deflation. A nation"s central bank will drop interest rates during deflation to encourage spending, in the case of Japan to near 0%." Central Banks setting any interest rate will cause a market failure. The type of deflation Japan was a market attempting to reach equilibrium, thus an artificial interest rate increased the length of the problem. This is currently being shown in the American economy with a too large money supply and too low interest rates. Markets can control both, better than a small group of political elites with an agenda.
3-Bank Supervision and Regulation
The Second Bank of the United States closure, an example of the US ending central banking. Then Con states "banks began keeping less in reserves". From Con"s own, Wikipedia source about the Panic of 1837, "On May 10, 1837, banks in New York City suspended specie payments, meaning that they would no longer redeem commercial paper in specie at full face value." If Con is asserting that banks were not keeping enough reserves, meaning less than 100%, then the Fed legalized this practice though fractional reserve banking. In periods of "sound money", that is money with commodity backing. Issuers of currency are required by natural property rights to provide on demand the agreed to amount of a commodity. Thus, if 1 unit of currency is backed by 5 widgets, the holder of said currency can receive 5 widgets from the issuer. If the issuers, begins to produce more units of currency than has widgets backing the currency the issuer has inflated this currency. Thus, has stolen from the holders of the widget backed currency. Every banking panic in America during from 1819 to 1907 was due to currency inflation http://www.libertyclassroom.com... . If like the Federal Reserve"s banking system with zero backing, zero times zero will always equal zero, thus zero reserves should be required.
The Federal Reserve"s banking regulations are essential by the inherit instability of fractional reserve banking http://www.ecfr.gov... . Any system that allows currency creation from nothing is immoral.
4) Macroeconomics should be treated as astrology!
Some imaginary ideas, which macro-economic theory asserts:
Individual savings = bad for an economy yet good for an individual
Lower prices = bad for an economy yet good for an individual
Free market for currency = bad for an economy yet good for an individual
Debt = required for an economy yet bad for an individual
Economies require steering by an all seeing overlord!
The Federal Reserve is a destructively immoral institution, confirmed by both Pro and Con as such. A free society cannot allow an institution such as this to continue.
R1-Punishes Innocent People
The problem with assuming that the Fed altering interest rates to either encourage or discourage spending is punishing innocent people is to look at what happens if they were to do nothing. I already showed that the Fed only significantly increases interest rates to prevent bubbles from becoming larger than they already potentially are (which there are numerous historical examples of how bubbles can be dangerous). As for lowering them, if no is spending the economy is in trouble and unemployment rates will then in result increase. Also, although they were perhaps too low throughout most of the 2000s, they were usually only dropped when the economy was not acting to its potential such as during the early 1990s and the 2008 recessions.The Fed cannot be critiqued for hypothetical situations that will never happen on a scale large enough for Pro’s arguments to hold any weight. However, its track record and abilities prove its necessity for a stable economy, which is needed for innocent and responsible people to thrive in.
One problem with the argument is that, to cite Pro’s example from the 1st round of lowering interest rates to save failing businesses, is that interest rate cuts don’t just apply to companies recording less profits. Also, Pro’s argument is based off a false premise that if a company’s profits are down, they must be an irresponsible company. There are several other factors that can lead to a decrease in profits. For example, if oil becomes really cheap, oil companies will make less in profits. This can be seen recently from the drop in the price of oil and how companies like Exxonmobil and Chevron have seen their stocks drop. (1, 2) Therefore, the Fed is not rewarding irresponsibility by lowering interest rates to prevent further economic downturn.
Also, Pro’s 2nd hypothetical had no consistency and made it hard to rebut. He first says people aren’t saving their money in banks, but then says that interest rates are lowered to discourage people from saving money in banks, and then finally criticizes fractional reserve banking. Although he does say QE is done to encourage people to spend. However, QE has only been done by the Fed during the Great Recession when the economy desperately needed spending.
Pro did not directly address interest rates last round. His only response to this and the two topics I just rebutted was a rhetorical question which cannot be classified as an argument.
Pro’s wrong saying that one’s savings need to be kept in dollars. Savings don’t need to be kept in banks, they can be kept in stocks, bonds, commodities, etc. Also, Pro says that businesses must accept dollars. However, that’s irrelevant to the topic and his source suggests otherwise. Pro then also shows (like I did) that gold is not any safer than the Dollar, which I only brought up because he seemed to be pro gold standard in the 1st round.
However, he says a dollar should have the same purchasing power over time. Purchasing power is an irrelevant statistic, as wages go up and savings accounts collect interest. As already shown, with increasing wages, the average American could afford a lot more butter per year than in 1990 compared to 1950. Pro doesn’t deny this (except for calling the State Department questionable, with no substance), but says it could be attributed to supply and demand. Perhaps, but the average American could purchase 4746 dozen eggs a year in 1950 compared to 19189 dozen in 1990, 71 bicycles in 1950 compared to 225 in 1990, and 49 electrical washing machines in 1950 compared to 69 in 1990. (3) Overall, wages have gone up faster than inflation has occurred.
Another reason purchasing power is irrelevant, is that most people put their money in banks which pay interest. Using a simplified version of the Fisher Equation:
Where “i” is the nominal interest rate (set by the Fed), “r” is the real interest rate, and “π” is the inflation rate. (4) As long as the Fed’s nominal interest rate is greater than the inflation rate, the real interest rate should not lag behind inflation. Recently, due to the Great Recession, the nominal interest rate has been really low, but during the mid 1990s, the inflation rate hovered between 2 & 3% (5), but interest rates were often higher than the inflation rate. This would mean there was a real interest rate, greater than the rate of inflation. So, therefore once interest rates are raised again (which they are expected to soon), savings accounts should be much closer to the rate of inflation. Overall then, any scares about inflation being theft would be baseless.
C2-Inflation vs. Deflation
Delayed purchases: Many people do wait for products, such as a computer goods to decrease in price. Also, the Christmas example definitely proves my point. People expect a product will be cheaper later, so they don’t purchase it right away, even due to their “desire to have it now”. This can be seen on a large scale during the Lost Decade. As known, Japan recorded little GDP growth in the 1990s and sometimes negative growth, GDP being represented by the equation:
This was with the Japanese government rapidly increasing spending (7)
However, Japan had already reached a nominal interest rate of near 0% and prices were dropping and people still weren’t spending. Along with debt increasing in value on Japanese companies, Japan faced stagnant economic growth and increasing unemployment.
Debt repayment: I don’t want to get too much into taxation, but I was simply making a point that the average person would suffer more from the US having its debt increase in value. I already showed that things that almost every American will purchase, a university, college, or other form of education, a house, a car, etc. and will most likely have to take debt to make this possible. Yet, Pro considers these to be people who “piled up large debts to please their overlords”. Pro also ignores that most start up businesses will require a loan to function. Not to mention, many companies may increase their debt in order to invest more into their business (and therefore the economy) and have this come back to hurt them during deflation.
Pro also shows how innovation causes deflation, but then creates a new equilibrium. However, this still ignores the necessity of accumulating debt and the fact deflation on a mass scale is not caused by innovations. Macroeconomists aren’t worried every time they see the price of their TV go down, but when prices as a whole go down and the Dollar deflates, there is a problem.
As for criticism of central banking through statements such as “central banks setting any interest rates causes a market failure” and “markets can control both, [money supply and interest rates] better than a small group of political elites with an agenda” are not elaborated or explained at all, and therefore are meaningless statements.
C3-Bank Supervision & Regulation
Fractional reserve banking would exist without the Fed. It is a good policy, but even if it wasn’t it would exist without the Fed. I won’t deny that inflation caused many banking panics in the Free Banking Era, but it was due to the fact that there wasn’t a centralized bank to prevent a ridiculous amount of different currencies to be printed. However, Pro asserts that since extreme fractional reserve banking and inflation existed during economic crisis, that means the Fed doing it is bad. However, the dollar itself is backed by supply and demand (just like “widgets” are). People accept its value based on the strength of a country’s economy. Also, having to lock a currency’s value based on some widget, is potentially dangerous. I’ve already shown many examples of when money needs to be injected or pulled out of the economy, but there are other times a lot of money is needed. For example, when the British needed a lot of money for World War I they had to go off the gold standard to support it. Of course, returning to the gold standard caused deflation and the UK suffered deflation throughout the 1920s. (8)
Should the Federal Reserve be abolished? Why abolish, lack of need, ineffectiveness, or immorality.
Lack of need was never addressed, but might have been an interesting angle to convince the free market types of the lack of need for the Fed, Pro will admit this as a mistake. People that support free markets in everything except currency, might have been more persuaded by this angle.
Pro didn't bother to go into detail in this point and merely said he should have, so I have nothing to rebut.
R1-Punishes Innocent People/R2-Rewards Irresponsibility
I addressed this all last round, yet Pro did not address my rebuttals.
"At what costs" cannot be classified as an argument. However, I'll answer that question with "a stronger economy", as proved throughout this debate by the Fed's abilities to prevent things such as deflation and prolonged recessions. However, Pro says that this a strong economy only benefits the upper class, while hurting those on a fixed income or those who saved. The problem with this thinking is that those on a fixed income may not even have jobs if there was a weak economy, and it would be even harder for them to live. For those who saved, one just has to account for the fact that when the economy is strong, interest rates are higher, and therefore savings accounts pay back more.
C2-Inflation vs. Deflation/R3-Distorts Markets
Pro did not address anything I showed last round of the dangers of deflation or my rebuttal to his claim it pushes the equilibrium to the right. However, it may be worth noting that if people are buying less and more are unemployed the market is not acting to its potential.
R4-Macroeconomics is Pseudoscience
Pro asks how can something can be good for one and then bad for all, posing saving specifically. As for saving, it's because the economy consists of people primarily spending and saving. Ideally, those who saved will later spend more and those who spent a lot with save later. However, if everyone does one thing at one time, the economy will either most likely form a bubble and amount debt or if no one's spending no one would have any jobs.
On top of dropped arguments already mentioned, Pro did not address last round:
-Different sources of saving
-Purchasing power vs. increase in wages
-The real interest rate
-The whole contention, of bank supervision and regulation
The Federal Reserve is necessary to keep a strong economy through changing interest rates, preventing deflation, and the regulation/supervision of banks. The Federal Reserve is not immoral, and if anything is moral as it keeps the economy strong, which is needed so people have money to support themselves and their families. For these reasons the Federal Reserve should not be abolished.
Waived by agreement