What will happen to the economy?

[MrBogosity]

It's the opposite problem. It's not that credit is bad so less credit is good; there needs to be an equilibrium. They only gave the market a shove in the other direction, too low instead of too much.

[Virgil0211]

It's the opposite problem. It's not that credit is bad so less credit is good; there needs to be an equilibrium. They only gave the market a shove in the other direction, too low instead of too much.

I understand that. I was primarily asking about it from the standpoint of the fractional reserve banking system versus full reserve. I remember from our discussions that the American free banking era had many bank failures because quite a few banks attempted to use a fractional reserve system and were thus unstable. Then, after we re-instituted a national banking system, the fractional reserve system set us up for that banking crisis in the early 1900s.

Could have something to do with the fact that I'm tired, but I was just contemplating the possibility that such a policy might help encourage banks to be more careful with their reserves so as to avoid banking runs. I agree that it's causing more problems than it might solve right now. My contemplation, I guess you could call it, would be with the idea of such a policy rather than its current version.

And just to be clear, I would most definitely prefer a free banking system over the one we have right now. Such a thing would be akin to sealing a leak in a pipe temporarily until a more permanent solution was implemented. (i.e., freeing up the banking system)

[MrBogosity]

The problem is, as long as they're still creating money out of thin air, it's still a problem. It's the wrong solution to the wrong problem.

[Virgil0211]

The problem is, as long as they're still creating money out of thin air, it's still a problem. It's the wrong solution to the wrong problem.

Good point, but what if we went onto the gold standard while maintaining our current fractional reserve banking system?

By the way, do you know if there are any models/methods for measuring black market activity in economics?

[MrBogosity]

None that I'm aware of.

[Travis Retriever]

However, I'm not quite as worried about the inflation itself as I am about the potential malinvestment leading to another contraction (which would probably prompt even more expansionary policy and inflation), the misdirected resources from taxation and government spending, and the national debt. As you're probably aware, government size is more easily increased rather than decreased. Once instituted, the new government programs and so forth are rarely scaled back or done away with. These programs direct production/consumption away from where it would naturally occur in the marketplace. This inflicts a deadweight loss on the economy, preventing growth in other industries. In addition, the government has less of an incentive to be efficient (not necessarily no incentive, as the voting booth does have an effect, but the strength of its influence pales in comparison to the profit motive), which has its own negative effects. They may pay their employees more than they would be paid for a similar job on the open market, or hire too many employees for a single job.

The government, when it spends money on a project such as defense, military, research into military technology, or an industry normally performed by a private entity, is essentially trying to hit a moving target whilst blindfolded. There is a minute possibility that it may hit its target, but this possibility is so small as to be almost impossible. Even if the target is hit at one point, said target is moving, and the government's inability to accurately determine where it is or where it will be means that it's almost a certainty that it will be missed. Thus, the government isn't able to effectively create as many needed jobs as the private sector, and must take jobs away from it in order to do anything.

Basically, what you're referring to is the economic calculation problem.
Reminds me of Mises exposing the planned economy being unable to structure production in any way resembling sanity.

Then there's the government debt. Eventually, we must pay it back. How we pay it back, whether through taxes or printing the money, will hurt the economy somehow. We'll either suffer a great deal of deadweight loss with higher taxes, increased inflation due to an expanded money supply, or (more likely) a combination of both.

Actually, there are 4 ways this can go down:

1. Voluntary means
2. direct taxation
3. inflation
4. repudiation (just refusing to pay the debts and canceling all of it to everyone owed).

I personally think it will come to either inflation or repudiation.
Because of this article:  http://mises.org/daily/4040 ("The War on the Young" by Brain Foglia)


"Unsurprisingly, the ever-declining value of the dollar also poses a large problem for the economic prospects of American youth. Even short of the hyperinflationary monetary collapse envisioned by the likes of Peter Schiff, John Williams, and Jim Rogers, inflation will soon be a very serious problem in the United States. Consider the enormous national debt (which now amounts to over 80% of GDP), the hopelessly massive federal budget deficit, and the overwhelming level of excess reserves lurking in the banking system. These liabilities will ultimately be financed by either printing money or repudiating the debt. Either of these scenarios will cause political upheaval on a very large scale."

[Travis Retriever]

None that I'm aware of.

Yet ironically, my economics textbook estimates it to be about $1 trillion in 2005 (no joke).

[Virgil0211]

Yet ironically, my economics textbook estimates it to be about $1 trillion in 2005 (no joke).

How did it arrive at that estimate?

I guess this might be a bit due to my background, but it seems to me that the black market would be an important element of any economy. The activities of the black market can influence an economy, one example being (according to a class I took a year or so back) when Florida's cocaine trade helped it weather a recession in the eighties (if I remember correctly. I'll have to double check to make sure.). As such, it seems to me that at least some aspect of economic research would be geared towards measuring this element.

[Travis Retriever]

How did it arrive at that estimate?

I guess this might be a bit due to my background, but it seems to me that the black market would be an important element of any economy. The activities of the black market can influence an economy, one example being (according to a class I took a year or so back) when Florida's cocaine trade helped it weather a recession in the eighties (if I remember correctly. I'll have to double check to make sure.). As such, it seems to me that at least some aspect of economic research would be geared towards measuring this element.

All it says is,

"Source: Friedrich Schneider and Dominik H. Enste, "Shadow Economics: Size, Causes, and Consequences," Journal of Economic Literature, March 2000, p. 104."
How the guy estimated that, I'll never know.