Wednesday, November 5, 2008

Macroecon Discussion Board 2

1.       Explain why the measures of money or the monetary aggregates are subsets of liquid financial asset. Why doesn’t gold fit?

The measures of money or the monetary aggregates are subsets of liquid financial assets in the sense that they represent deposits, investments, currency holdings, and other stores of monetary value. These are then classified as M1, M2, M3, and L.

The idea that gold does not fit would suggest that gold is not liquid. Transferring gold from account to account is a hefty task, due to its size and weight. However, gold does fit in the sense that it is represented in futures contracts or receipts, which can easily be transferred physically or by electronic deposit, just like M1, M2, M3, or L.

Gold is a contested subject across the various schools of economic thought. Keynes believed it was a “barbaric metal.” Some believe that money should be based on a gold standard. Other schools of thought believe that the current system of printing money by government fiat is better than gold. Regardless of one’s school of economic thought, there are several facts about gold that cannot be overlooked. First, gold has been the one of the most widely accepted and utilized means of exchange since the dawn of civilization. It is recognized throughout the world, and is always in demand. Second, gold is a tangible physical asset that retains its value and cannot be created by fiat. It can be mined and coined by fiat, but not created. Third, gold’s role as a form of money and store of value is confirmed by governments and central banks each and every day they continue to hold and acquire vast stores of it. Gold ownership was made illegal in the United States by FDR, and his administration went to great lengths to seize it from private owners. The reason is its role as a medium of exchange undercuts the ability for the Federal Reserve to print currency at will.

2.       Comment on the statement that the money creation process has been privatized over the years in the U.S. 

The idea that the money creation process has been privatized in the United States suggests that depository institutions in the private sector have the ability to create credit by lending out monetary assets that would be classified as M1. This type of credit creation is primarily done by depository institutions (commercial banks, credit unions, etc) in the lending/credit markets, and represents the bulk of M1 assets. Specifically these assets are represented by checkable deposits that represent the monetizing of debt.

3.       Why is the FED independent of the executive and legislative branches of the Federal Government?

The Federal Reserve is independent of the executive and legislative branch primarily because it is technically not a government agency; it is an autonomous central bank. Essentially it is a system of private banks that was designed to have monopolist control over the money supply of the United States, set monetary policy, prevent bank runs and losses, and print currency. The Federal Reserve operates outside of the reach of the executive and legislative branch with no oversight. Its independence is secured and guaranteed officially by the Federal Reserve Act of 1913. The official reason for its independence is so that its operations are not influenced by politics.   

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