That’s why a flight from the U.S. dollar will produce hyperinflation in terms of dollar denominated assets.

“Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks — and therefore a smaller volume of cash balances. Money thus is truly a paradox – by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money – and reduce its velocity.”

“An increase in the demand for money is concomitantly associated with an equal and opposite decrease in the supply of money, and vice versa; and that an increase in the supply of money is concomitantly associated with an equal and opposite decrease in the demand for money & vice versa.”

“The demand for money should not be confused with the demand for loan-funds. The demand for loan-funds is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money. Insofar as there is a relationship it may be said that an increase in the demand for loan-funds tends to be associated with a decrease in the demand for money.”

The Fed is extremely “tight”. The rate of change in the proxy for inflation (MVt) has declined in 17 of the last 18 months. That’s a very tight monetary policy.

Supply of and demand for money make sense if you remember that money begins life as just another commodity. Rothbard’s “Man, Economy and State” says who pointed this out – I can’t remember the name, but the idea is older than Keynes.

Mises would abolish central banking, so in one sense you’re right that he’d be a worse central banker than Volcker.

If Bernanke really means to turn off the spigot, then he’s pulled a hell of a headfake over the years with his helicopter speeches and apologies to Milton Friedman (for the Fed supposedly not reflating enough after 1929). But I don’t think the credit belongs to him any more than it did to Volcker. I see the bubble as collapsing under the weight of lender and borrower exhaustion.

That’s the first article I’ve read about Volcker that had the right idea. I enjoyed it.

No Volcker didn’t try monetarism, but Ben Bernanke is (the first).

The real problem lies with the bankers, their lobbyist, and the ABA (any discourse would end in libel)

And there are technical problems: the monetary base is not a base for the expansion of the money supply. Monetarism involves targeting total reserves not non-borrowed reserves.
Monetarism involves targeting monetary flows (MVt), not any particular monetary aggregate. The “price” of money is the inverse of the price level. The “supply of and demand for money” is Keynesian dogma & bogus.
My take is that Mises lacks an adequate knowledge of money & central banking and that he would have likely performed worse than Volcker.

Special thanks to Aaron Krowne who got the ball rolling over at ml-implode.com and hf-implode.com and sent us over 5,000 visitors with his link!

http://goldensextant.com/SavingtheSystem.html

‘The Maestro, no slouch himself in the monetary reserve creation department, was a piker in comparison to post-Penn Square Volcker.’

“the banks are tighting the way the do buisines with the public, no more creative lending, or sub prime loans for people with no such a good credit”

http://www.mises.org/mysteryof.....anking.pdf

‘The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.’

http://www.mises.org/rothbard/historyofmoney.pdf

‘[T]he inflationary policies of Hoover and [Federal Reserve Board Governor Eugene] Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash – Federal Reserve notes – for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves – these excess reserves rising to 10 percent of total reserves by mid-year. A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only “pushing on a string.” But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don’t have to wait for new loan requests. Why didn’t they do so? Because the banks were whipsawed between two forces. On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors. Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks’ incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.’

Congrats, Lee, on this article being mentioned by Mike Shedlock.

Yeah they made it a penalty rate – about 25 years too late (and now at the wrong time). And Paul Volcker executed the easiest monetary policy ever. And Bernanke is following the tightest monetary policy ever. If anyone in charge can get us out of this mess it’s Bernanke. He should be given a life-time post as Chairman.

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Consider if you will commentators, the following:

The more short term rates are cut, the more gold comes into competition with short term treasuries.

It requires leverage to build up a portfolio of currency bets, so those may be restrained in a credit crunch. Some of these currency trading accounts are offering 200x leverage. One wrong bet, and the money is gone.

If you place cash in a currency account, then you are expecting a monthly return of very limited percentages. And if you were to place your money into a medium term bond with the least risk of decline in terms of yield and price fluctuation, then the money is put away for a long time.

So what do you do if you have cash and want to place it in a liquid investment and have to weigh the risks?