Which currency system do you think is best?
 

If you want more info about the options just ask.

Re: Which currency system do you think is best?
 

I voted free market money but I am by no means an expert in this area. I would like to look into more information about fiat money controlled by a computer structure.

Re: Which currency system do you think is best?
 

i haven't voted yet.

i think 3 may be the best option if it started from scratch. in "Money Mischeif" by Milton Freidman, he tells of the island of somethingorother somehwere. on this island, the wealth of the individuals was linked to large stones that had to be mined, shaped, and carried to a location.

the faith in this system was so strong that the richest person didn't even have possesion of his wealth. it was simply believed to be at the bottom of the ocean since it was so large it sunk the boat that attempted to carry it back to his home.

but the mere rumor of its existance was enough to grant him food, land, etc. since it was believed that the big stone wheel did in fact exist.

the problem w/ # is that we've been exposed to one type of money and that generating that type of faith in something new would be very difficult. i think that it would probably be ideal but impossible to move to now.

gold on the other hand, as worded in the first option, is another impossibility as has been proven in the past. governemtns cannot operate a gold standard without intervention in times of trouble. it has occurred in the past but always ends in disruption. the govt has such incentive to move the money supply that it will not stay locked to the production increases in gold.

additionally, a money supply linked to the production of the commodity, seems like would limit the productive capacity of an economy to the production of that commodity. a basket of commodities imo would have strange effects since some of the basket would be weighted differently than other commodities due to their availability/relative abundance.

typically, you could expect though that a well administered faithful single commodity based monetary system with known reserves and a predictable production capacity that can increase steadily around a band would be ideal. in that way, the money supply could increase at about the rate of growth of the economy.

the problem, again, is that some producers have huge incentives to overproduce and thus increase the money supply, so the govt or an over-arching authority would have to take control of the productive capacity for that commodity/basket of commodities.

so the question you asked is very difficult to answer. and the answer i'd give depends very sensitively on how it is worded.

if you ask "starting from scratch, which would be best"

i'd say the free market monetary system.

if you ask "given where we are now, which would be best"

i'd actually say the fiat monetary system. the reason is because faith in this system is so strong overall and the administration of it has widespread support.

to switch to a gold standard now would entail the govt taking control of all production and that would only be in the US. china and tons of other metals producers could influence the US monetary system as could importers. the world (productively speaking) would have to agree to a system of controls on production.

to switch to a free market system now would also be very difficult for faith and similar reasons as discussed above.

i'm much more comfortable w/ my answer to the question regarding "starting from scratch" than i am w/ my answer to the question "given where we are now."

aka, i'm open to disucssion on the vote for fiat system we have now and how to overcome the huge obstacles to a switch.

thoughts?

Barron

Re: Which currency system do you think is best?
 

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I voted free market money but I am by no means an expert in this area. I would like to look into more information about fiat money controlled by a computer structure.

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look up "Taylor Rule"

i think that is the algorithm by which the computer would operate.

Barron

Re: Which currency system do you think is best?
 

I think it might be Rothbard's 'The Mystery of Banking' in which he lays out the arguments for free banking and how it would necessarily result in 100% reserve standard (because as individual banks gave out notes they would quickly get redeemed by other banks, so any bank which used less than a 100% reserve standard would be broke fast). So that's what I'm for, the currency developed in a free banking system - 100% reserve gold standard undoubtably.

Re: Which currency system do you think is best?
 

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the faith in this system was so strong that the richest person didn't even have possesion of his wealth. it was simply believed to be at the bottom of the ocean since it was so large it sunk the boat that attempted to carry it back to his home.

but the mere rumor of its existance was enough to grant him food, land, etc. since it was believed that the big stone wheel did in fact exist.

the problem w/ # is that we've been exposed to one type of money and that generating that type of faith in something new would be very difficult. i think that it would probably be ideal but impossible to move to now.

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I dont really see how this example explains much. He seems to be thinking money is some abstract psychology. This is not the case. The ability to redeem is very important. Gold would never have been dug out the ground for monetary purposes if that wasn't the case.

I also i disagree with the idea that switching entails massive costs. Society is much more maleable than you give credit for. We have seen many examples of industries in society move from socialist to private with nothing but success. We've also seen things in the other direction in that governments will change from gold standard to fiat money by the whim of a pen or design other odd structures and just impose them the next day.

IMO, with the entrepreneurial window open and the freedom of consumers and producers unveiled, on top of the necessity of maiting the division of labor and the vast economy, society will quickly adpot and continually improve on a monetary system.

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gold on the other hand, as worded in the first option, is another impossibility as has been proven in the past. governemtns cannot operate a gold standard without intervention in times of trouble. it has occurred in the past but always ends in disruption. the govt has such incentive to move the money supply that it will not stay locked to the production increases in gold

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i agree

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typically, you could expect though that a well administered faithful single commodity based monetary system with known reserves and a predictable production capacity that can increase steadily around a band would be ideal. in that way, the money supply could increase at about the rate of growth of the economy

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I dont like the way that last sentence is phrased. The money supply does not need to grow at all. As the demand for money rises the value of money rises which is all that is necessary. Since you said predictable though the market will make the necessary adjustments and this shouldnt be a problem.

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additionally, a money supply linked to the production of the commodity, seems like would limit the productive capacity of an economy to the production of that commodity. a basket of commodities imo would have strange effects since some of the basket would be weighted differently than other commodities due to their availability/relative abundance.

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I dont see why your first sentence is true.

The different weightings are meant to provide a less volatile purchasing power for each monetary unit. The main basis of the system is the idea that surplus commodities represent societal wealth. Societal surpluses should be the basis of money by Graham's idea.

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to switch to a gold standard now would entail the govt taking control of all production and that would only be in the US. china and tons of other metals producers could influence the US monetary system as could importers. the world (productively speaking) would have to agree to a system of controls on production

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aside from the governments having their hands tied i dont see this as so bad.

Re: Which currency system do you think is best?
 

i'd like to talk about this for a second:

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I dont like the way that last sentence is phrased. The money supply does not need to grow at all. As the demand for money rises the value of money rises which is all that is necessary. Since you said predictable though the market will make the necessary adjustments and this shouldnt be a problem.

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why do you think the money supply does not need to grow? i guess in the sense that the economy doesn't "need" to grow at a certain rate, but i think it is best htat the economy grow as best it can within certain bounds. if the price of money rises as demand for it rises, the marginal use of it will fall and the economy will not grow as it would had the money supply increased by the rate of growth of the economy (about the "band" i was talking about).

imo the money supply SHOULD grow at the rate of growth of the economy.

Barron

Re: Which currency system do you think is best?
 

"The money supply does not need to grow at all. As the demand for money rises the value of money rises which is all that is necessary."

Even if the whole world had one currency, I don't see how this can be correct (probably because I'm not educated on economics) because, in my view, China, with a trade surplus of over 20 billion a month, would eventually have all the money.

That an extreme statement, as once consumers see they are on a dead end economic street, they'll start producing in their own country. Now that sounds like a win situation for the working class.

Re: Which currency system do you think is best?
 

"imo the money supply SHOULD grow at the rate of growth of the economy"

But at a much slower rate than the growth of the economy, since so much of that money is spent on foreign goods....right?

Re: Which currency system do you think is best?
 

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why do you think the money supply does not need to grow? i guess in the sense that the economy doesn't "need" to grow at a certain rate, but i think it is best htat the economy grow as best it can within certain bounds. if the price of money rises as demand for it rises, the marginal use of it will fall and the economy will not grow as it would had the money supply increased by the rate of growth of the economy (about the "band" i was talking about).

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Think about techonlogy. Productivity has been inreasing faster than the money supply for ages. This doesnt stifle growth, innovation, or impose an negative costs on the industry. This what is known as benign deflation.

Re: Which currency system do you think is best?
 

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Even if the whole world had one currency, I don't see how this can be correct (probably because I'm not educated on economics) because, in my view, China, with a trade surplus of over 20 billion a month, would eventually have all the money.

That an extreme statement, as once consumers see they are on a dead end economic street, they'll start producing in their own country. Now that sounds like a win situation for the working class.

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If china is the only coutnry producing why shouldnt they have all the wealth?

This is the point. The US and other countries will be forced to up their productivity if they dont want to go broke consuming everything they have.

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That an extreme statement, as once consumers see they are on a dead end economic street, they'll start producing in their own country. Now that sounds like a win situation for the working class.

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exactly

Re: Which currency system do you think is best?
 

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why do you think the money supply does not need to grow? i guess in the sense that the economy doesn't "need" to grow at a certain rate, but i think it is best htat the economy grow as best it can within certain bounds. if the price of money rises as demand for it rises, the marginal use of it will fall and the economy will not grow as it would had the money supply increased by the rate of growth of the economy (about the "band" i was talking about).

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Think about techonlogy. Productivity has been inreasing faster than the money supply for ages. This doesnt stifle growth, innovation, or impose an negative costs on the industry. This what is known as benign deflation.

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another thing i wanted to mention is there no bounds by which an economy must be restrained. This is only a factor of situation today since bankers must make trade offs between inflation and growth.

Re: Which currency system do you think is best?
 

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why do you think the money supply does not need to grow? i guess in the sense that the economy doesn't "need" to grow at a certain rate, but i think it is best htat the economy grow as best it can within certain bounds. if the price of money rises as demand for it rises, the marginal use of it will fall and the economy will not grow as it would had the money supply increased by the rate of growth of the economy (about the "band" i was talking about).

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Think about techonlogy. Productivity has been inreasing faster than the money supply for ages. This doesnt stifle growth, innovation, or impose an negative costs on the industry. This what is known as benign deflation.

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can you link data for this? i think productivity has been growing far slower than the money supply in the US (~1-5% vs. ~8%) for a while.

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another thing i wanted to mention is there no bounds by which an economy must be restrained. This is only a factor of situation today since bankers must make trade offs between inflation and growth.

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but keeping the money supply 100% fixed does restrain economic growth.

the point about productivity though is a good one and i should restate that the money supply should grow by the economic trend growth rate minus the trend growthrate of productivity.

Barron

Re: Which currency system do you think is best?
 

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can you link data for this? i think productivity has been growing far slower than the money supply in the US (~1-5% vs. ~8%) for a while

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I was refering to the techonlogy sector. Prices have been persistently falling and this is reinforced by new innovation because old products lose monetary value very quickly and products dont stay new for long. If productivity was growing slower than monetary expansion prices definitely would not be falling at the rate they have been in this sector.

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the point about productivity though is a good one and i should restate that the money supply should grow by the economic trend growth rate minus the trend growthrate of productivity.

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This im fine with. Any extra savings should allow for increasing investment.

The money supply being fixed has similar effects though. The growth of the money supply just occurs internally rather than externally. This happnes through the subdivision of previous wealth to include new wealth but each monetary unit retains a greater value than before.

Re: Which currency system do you think is best?
 

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can you link data for this? i think productivity has been growing far slower than the money supply in the US (~1-5% vs. ~8%) for a while

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I was refering to the techonlogy sector. Prices have been persistently falling and this is reinforced by new innovation because old products lose monetary value very quickly. If productivity was growing slower than monetary expansion prices definitely would not be falling at the rate they have been in this sector.

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i haven't studied this so i'm not sure about it.

i think innovation not productivity caused the fall in prices as old products become obsolete so quickly in the tech sector that prices are forced to fall in order to keep up sales.

productivity is labor hours to produce goods. innovation is increased quality of goods. innovation makes previously produced goods much less attractive and reduces the demand for them. this reduced demand mandates price reductions in order to keep up sales.

i'm not 100% sure of these definitions as productivity may be measured in per unit of memory or something like that in which case it is obviously increasing, but if not, then the above case definitely holds.

further, i don't think money supply is a good measure within individual sectors.

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the point about productivity though is a good one and i should restate that the money supply should grow by the economic trend growth rate minus the trend growthrate of productivity.

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This im fine with. Any extra savings should allow for increasing investment.

The money supply being fixed has similar effects though. The growth of the money supply just occurs internally rather than externally. This happnes through the subdivision of previous wealth to include new wealth but each monetary unit retains a greater value than before.

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what? can you rephrase that b/c i don't think i understand that last part.

thanks,
Barron

Re: Which currency system do you think is best?
 

"keeping the money supply 100% fixed does restrain economic growth."

Let's say we went from 1900 to 2000 without a war. 300 million people now. 100 million in 1900? A lot less dollars per person.

Therefore, my father-in-law, who constantly complains about the cost of living, would not be complaining. Correct?

I assume I am correct, because his money would be worth a lot more than it is today.

He built what he has by buying a ranch, fixing it up, buying another, then going thru 4 houses fixing them up, after retiring from the VA police dept.

So, he has a house, worth 350k in a city where the avg house goes for 250k, of which he holds the deed, SSI, retirement from the police dept. and 425k.

So, the Federal Reserve, by creating more, is stealing from him and giving to the rich?

That's what I tell him.

He thinks it was the unions demanding more pay for workers. I can't convince him, but then, he's 85 yrs old. He borrowed to buy his two ranches and never borrowed again.

He never owned a credit card until his wife finally convinced him of the need to maintain a credit history. When she died, they owed a total of about $1500.00 on various cards.

Re: Which currency system do you think is best?
 

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"keeping the money supply 100% fixed does restrain economic growth."

Let's say we went from 1900 to 2000 without a war. 300 million people now. 100 million in 1900? A lot less dollars per person.

Therefore, my father-in-law, who constantly complains about the cost of living, would not be complaining. Correct?

I assume I am correct, because his money would be worth a lot more than it is today.

He built what he has by buying a ranch, fixing it up, buying another, then going thru 4 houses fixing them up, after retiring from the VA police dept.

So, he has a house, worth 350k in a city where the avg house goes for 250k, of which he holds the deed, SSI, retirement from the police dept. and 425k.

So, the Federal Reserve, by creating more, is stealing from him and giving to the rich?

That's what I tell him.

He thinks it was the unions demanding more pay for workers. I can't convince him, but then, he's 85 yrs old. He borrowed to buy his two ranches and never borrowed again.

He never owned a credit card until his wife finally convinced him of the need to maintain a credit history. When she died, they owed a total of about $1500.00 on various cards.

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i have no idea what you're saying. can you sum up your point in a coherent sentence please?

thanks,

Barron

Re: Which currency system do you think is best?
 

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but keeping the money supply 100% fixed does restrain economic growth.

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How?

And if true (big if IMO), how does this justify the government stealing money from me to inflate it?

Re: Which currency system do you think is best?
 

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but keeping the money supply 100% fixed does restrain economic growth.

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How?

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as the economy and country grow (i.e. more people, more companies, more goods etc.) beyond the increase in productivity, a 100% fixed money supply would make the price of money rise thus restraining borrowing, spending and growth. if the money supply grows at the rate of trend growth minus the increases in productivity, then that rate of growth can be comfortably sustained. otherwise, the growth rate would be lower than it otherwise would be.

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And if true (big if IMO), how does this justify the government stealing money from me to inflate it?

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uh, what? i never said anything like that.

Barron

Re: Which currency system do you think is best?
 

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"keeping the money supply 100% fixed does restrain economic growth."

Let's say we went from 1900 to 2000 without a war. 300 million people now. 100 million in 1900? A lot less dollars per person.

Therefore, my father-in-law, who constantly complains about the cost of living, would not be complaining. Correct?

I assume I am correct, because his money would be worth a lot more than it is today.

He built what he has by buying a ranch, fixing it up, buying another, then going thru 4 houses fixing them up, after retiring from the VA police dept.

So, he has a house, worth 350k in a city where the avg house goes for 250k, of which he holds the deed, SSI, retirement from the police dept. and 425k.

So, the Federal Reserve, by creating more, is stealing from him and giving to the rich?

That's what I tell him.

He thinks it was the unions demanding more pay for workers. I can't convince him, but then, he's 85 yrs old. He borrowed to buy his two ranches and never borrowed again.

He never owned a credit card until his wife finally convinced him of the need to maintain a credit history. When she died, they owed a total of about $1500.00 on various cards.

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i have no idea what you're saying. can you sum up your point in a coherent sentence please?

thanks,

Barron

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The money supply has been growing (under the Clinton & Bush Administrations) much faster than the economy, thus deflating the value of the dollar. Right?

Re: Which currency system do you think is best?
 

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"keeping the money supply 100% fixed does restrain economic growth."

Let's say we went from 1900 to 2000 without a war. 300 million people now. 100 million in 1900? A lot less dollars per person.

Therefore, my father-in-law, who constantly complains about the cost of living, would not be complaining. Correct?

I assume I am correct, because his money would be worth a lot more than it is today.

He built what he has by buying a ranch, fixing it up, buying another, then going thru 4 houses fixing them up, after retiring from the VA police dept.

So, he has a house, worth 350k in a city where the avg house goes for 250k, of which he holds the deed, SSI, retirement from the police dept. and 425k.

So, the Federal Reserve, by creating more, is stealing from him and giving to the rich?

That's what I tell him.

He thinks it was the unions demanding more pay for workers. I can't convince him, but then, he's 85 yrs old. He borrowed to buy his two ranches and never borrowed again.

He never owned a credit card until his wife finally convinced him of the need to maintain a credit history. When she died, they owed a total of about $1500.00 on various cards.

[/ QUOTE ]

i have no idea what you're saying. can you sum up your point in a coherent sentence please?

thanks,

Barron

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The money supply has been growing (under the Clinton & Bush Administrations) much faster than the economy, thus deflating the value of the dollar. Right?

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yea there probably aren't any threads about that in this forum.

Barron

Re: Which currency system do you think is best?
 

If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

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No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

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No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

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you are definitely not describing deflation.

Barron

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

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good summary...i pretty much said this though i forgoto to term it as deflation.

which should have been obvious but i missed iti anyways.

Barron

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

[/ QUOTE ]

No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

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you are definitely not describing deflation.

Barron

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Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

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No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

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you are definitely not describing deflation.

Barron

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Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

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that is fair, you are describing deflation. i just read it as all that money being poured to risky borrowers. that isn't deflation.

you've basically polarized the choices. here is the thought behind why i don't think deflation is better than small inflation:

all else equal, economic growth is a good thing. it increases overall employment, improves per capita GDP and generally is termed as the "rising tide" that "lifts all boats."

in a society with total credit outlays (i.e. bank loans, corporate loans etc.) of level X, lets say that this same society has an annualized trend growth rate of Y.

X and Y are proportional for small-medium sized changes in X (large increases in X can, after longer lags, hurt the overall growth rate).

so a marginal increase in the amount of borrowing in a society results in a marginal increase in growth.

if you introduce deflation into this society, X will fall. and thus Y will fall.

further, you are making a thick line (polarizing) between "deflation" and "huge increases in the money supply" where even the riskiest borrowers are getting loans since the money needs to find a home.

by taking it more slowly and seeing it as a spectrum from deflation to massive money supply inflation you can see that in the deflation case, money is being kept out of the hands of otherwise productive borrowers.

look at it this way: there are 10 borrowers who would add value to the economy at the earlier levels of X. if you reduce X, one or more of those 10 borrowers would not be able to add value to the economy and growth would slow.

alternitively, starting from X-n, you see that as you reduce the value of n, more productive borrowers can contribute to the growth rate of the society.

as n turns negative (and TCO increases) more productivity does occur, though returns to it are marginally decreasing.

risky borrowing doesn't relaly occur until n is significantly negative.

the choice as i see it described in this thread is between a "fixed" money supply (which causes deflation) and a money supply that grows at the rate of trend growth minus trend productivity increases.

i don't see how anybody could make the choice of deflation here. personally i think you may have a predisposition against any inflation given the wording of your response.

Barron

Re: Which currency system do you think is best?
 

There's a lot of talk here about which system is "good for the economy". To me, this is the wrong question.

To quote Nielsio (sometimes he's right despite the flak)... "Is it voluntary?"

If we are going to have a federal govt issuing money, at least it should not be a criminal offense for someone to issue their own notes of tender. If people want to use Bob Dollars and exchange them for goods with other people who voluntarily trade with them, there's no reason in a free society that they should go to jail for it. Having an alternative promotes competition and may allow for better systems to emerge and gain acceptance on their own accord rather than be forced on everyone through law and threat of force. And if no alternative is as good as the US dollar, then so be it, people will choose to use the dollar almost exclusively without needing to be forced to do so.

This happens all the time. We use the wrong metric to define "good". Economic progress has become the only standard of good in this country and people need to realize that if we use the metric of "free", the economic progress will generally follow anyway, but even if not quite as high (doubtful, but let's assume possible), the standard of living will still be impacted in other ways -- like living more freely and responsibly like a nation of free men and women. Imagine that.

So to sum up: I don't have any specific objection to public tender in a democracy so long as it isn't forced on everyone through the threat of force as the only alternative. This is basically my stance on most govt programs.

Re: Which currency system do you think is best?
 

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Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

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I think this is what's usually described as a liquidity trap...

Re: Which currency system do you think is best?
 

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If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

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No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

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you are definitely not describing deflation.

Barron

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Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

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that is fair, you are describing deflation. i just read it as all that money being poured to risky borrowers. that isn't deflation.

you've basically polarized the choices. here is the thought behind why i don't think deflation is better than small inflation:

all else equal, economic growth is a good thing. it increases overall employment, improves per capita GDP and generally is termed as the "rising tide" that "lifts all boats."

in a society with total credit outlays (i.e. bank loans, corporate loans etc.) of level X, lets say that this same society has an annualized trend growth rate of Y.

X and Y are proportional for small-medium sized changes in X (large increases in X can, after longer lags, hurt the overall growth rate).

so a marginal increase in the amount of borrowing in a society results in a marginal increase in growth.

if you introduce deflation into this society, X will fall. and thus Y will fall.

further, you are making a thick line (polarizing) between "deflation" and "huge increases in the money supply" where even the riskiest borrowers are getting loans since the money needs to find a home.

by taking it more slowly and seeing it as a spectrum from deflation to massive money supply inflation you can see that in the deflation case, money is being kept out of the hands of otherwise productive borrowers.

look at it this way: there are 10 borrowers who would add value to the economy at the earlier levels of X. if you reduce X, one or more of those 10 borrowers would not be able to add value to the economy and growth would slow.

alternitively, starting from X-n, you see that as you reduce the value of n, more productive borrowers can contribute to the growth rate of the society.

as n turns negative (and TCO increases) more productivity does occur, though returns to it are marginally decreasing.

risky borrowing doesn't relaly occur until n is significantly negative.

the choice as i see it described in this thread is between a "fixed" money supply (which causes deflation) and a money supply that grows at the rate of trend growth minus trend productivity increases.

i don't see how anybody could make the choice of deflation here. personally i think you may have a predisposition against any inflation given the wording of your response.

Barron

[/ QUOTE ]

When it comes to increasing the money supply for the purpose of having money available for new production, doesn't the U.S. have to first make up for the export of its dollars due to the trade deficit?

Or why can't they just borrow it from the countries with the trade surplus with us? China has a 2.4 trillion war chest to invest with don't they?

Re: Which currency system do you think is best?
 

[ QUOTE ]
[ QUOTE ]

Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

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I think this is what's usually described as a liquidity trap...

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By people in who's interests it is that the government controls the money supply. Noone cares about GDP it is a practically meaningless statistic. People care about standard of living and what their paycheck can buy this year as opposed to last year.

Re: Which currency system do you think is best?
 

You are making a mistake of aggregation. "the economy" is not a thing it is just an easy way of decribing a bunch of transactions. At the individual level Y doesn't matter. Having a goal for Y makes no sense.

Also can you explain why some increased borrowing (ie borrowing that wouldn't happen if there wasn't inflationary policy) is good but some more increased borrowing is bad. How do you add up positives and make a negative?

Re: Which currency system do you think is best?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
If the money supply doesn't grow, dollars will become more valuable as the population increases. This is deflation.

People have an incentive to save because in the future, their money will be worth more. Borrowing would become difficult, keeping money out of the hands of the most productive members of society, slowing the economy.

[/ QUOTE ]

No money will start going only to people who can truly provide real returns on it rather that shot wildly into stock market bubbles and [censored] loans with no hope of repayment. The money is losing value so fast that it has to be pushed out to all kinds of unsavoury characters that noone in their rihgt mind would give loans to in a well run (ie free) society.

[/ QUOTE ]

you are definitely not describing deflation.

Barron

[/ QUOTE ]

Say deflation is 3%. Your money is increasing in value even if you put it under your matress. You are getting a 100% risk free return of 3% every year. Therefore you are only going to lend to people who can offer you very high returns or practically riskless returns of 5-10%. There's no pressure to lend to high risk people because your money is gaining value just sitting there. People looking for money to be lent to them are going to have to make a very good business case. No more bubbles no more lending crises. Many financial problems solved.

[/ QUOTE ]

that is fair, you are describing deflation. i just read it as all that money being poured to risky borrowers. that isn't deflation.

you've basically polarized the choices. here is the thought behind why i don't think deflation is better than small inflation:

all else equal, economic growth is a good thing. it increases overall employment, improves per capita GDP and generally is termed as the "rising tide" that "lifts all boats."

in a society with total credit outlays (i.e. bank loans, corporate loans etc.) of level X, lets say that this same society has an annualized trend growth rate of Y.

X and Y are proportional for small-medium sized changes in X (large increases in X can, after longer lags, hurt the overall growth rate).

so a marginal increase in the amount of borrowing in a society results in a marginal increase in growth.

if you introduce deflation into this society, X will fall. and thus Y will fall.

further, you are making a thick line (polarizing) between "deflation" and "huge increases in the money supply" where even the riskiest borrowers are getting loans since the money needs to find a home.

by taking it more slowly and seeing it as a spectrum from deflation to massive money supply inflation you can see that in the deflation case, money is being kept out of the hands of otherwise productive borrowers.

look at it this way: there are 10 borrowers who would add value to the economy at the earlier levels of X. if you reduce X, one or more of those 10 borrowers would not be able to add value to the economy and growth would slow.

alternitively, starting from X-n, you see that as you reduce the value of n, more productive borrowers can contribute to the growth rate of the society.

as n turns negative (and TCO increases) more productivity does occur, though returns to it are marginally decreasing.

risky borrowing doesn't relaly occur until n is significantly negative.

the choice as i see it described in this thread is between a "fixed" money supply (which causes deflation) and a money supply that grows at the rate of trend growth minus trend productivity increases.

i don't see how anybody could make the choice of deflation here. personally i think you may have a predisposition against any inflation given the wording of your response.

Barron

[/ QUOTE ]

When it comes to increasing the money supply for the purpose of having money available for new production, doesn't the U.S. have to first make up for the export of its dollars due to the trade deficit?

Or why can't they just borrow it from the countries with the trade surplus with us? China has a 2.4 trillion war chest to invest with don't they?

[/ QUOTE ]

you're thinking as if the current account is in isolation.

any deficit in the current account is *necessarily* offset by a surplus in the capital account. that is how the balance of payments works.

any net goods flowing in (dollars flowing out) is offset by net currency flowing in (borrowing from the rest of the world).

this has no impact on the internally created money supply in terms of total dollars in the system assuming no other country can create dollars.

what it WOULD do imo would be to further restrict growth since goods that would be required for production of other goods/services would now have to be imported (if money supply was fixed) rather than produced domestically via borrowing and production.

this last part is a very simplified view but i believe is close enough as to capture the essence of the issue.

EDIT: more accurately, i think the whole world would suffer in relative terms and the CA deficit would naturally be reduced...that that isn't necessarily a good thing. if money supply is fixed, consumption would fall overall. a reduction in consumption would hurt imports as well as domestic spending. so we'd grow less (relative to a marginally increasing money supply) AND the rest of the world would grow less as we import less from them as well.

Barron

Re: Which currency system do you think is best?
 

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but keeping the money supply 100% fixed does restrain economic growth.

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It restrains some particular parties' growth for sure.

Whether it does so for the aggregate is another matter that would require more than bare assertion.

But even if it does, this is really not of much concern for those who value freedom and do not "worship the almighty dollar" (as ACists are routinely accused of doing).

Re: Which currency system do you think is best?
 

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you're thinking as if the current account is in isolation.

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I was referring to the sytem we have today, so how can I be talking about it being in isolation? Help me here, please.

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any deficit in the current account is *necessarily* offset by a surplus in the capital account. that is how the balance of payments works.

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Certainly. But if Mattel pays China x for a product and sells it to Americans for x4, x goes to China everytime Mattel buys the product, depleting America's money supply. Unless, we have a trade surplus, or our exports equal inports. No?

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any net goods flowing in (dollars flowing out) is offset by net currency flowing in (borrowing from the rest of the world).

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If you have to borrow to produce, that's more expensive than having the working capital available. Even if you can make more by investing your capital in something else and borrow, at a cheaper rate to produce, you still need the capital.
So isn't what you say above more expensive than keeping out dollars at home by preventing a trade deficit?

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this has no impact on the internally created money supply in terms of total dollars in the system assuming no other country can create dollars.

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Ok. We are not talking about the same thing, since all other countries can create more dollars.

[ QUOTE ]
what it WOULD do imo would be to further restrict growth since goods that would be required for production of other goods/services would now have to be imported (if money supply was fixed) rather than produced domestically via borrowing and production.

this last part is a very simplified view but i believe is close enough as to capture the essence of the issue.

EDIT: more accurately, i think the whole world would suffer in relative terms and the CA deficit would naturally be reduced...that that isn't necessarily a good thing. if money supply is fixed, consumption would fall overall. a reduction in consumption would hurt imports as well as domestic spending. so we'd grow less (relative to a marginally increasing money supply) AND the rest of the world would grow less as we import less from them as well.

[/ QUOTE ]

Are you not saying that the dollar, if on a gold standard, would eventually have so much value, compared to the economy and population, that you would have to break down the penney into fifths, or even tenths?

I can see how that would not be good for productivity, as one would become wealthy by keeping their money in their mattress.

Re: Which currency system do you think is best?
 

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[ QUOTE ]
but keeping the money supply 100% fixed does restrain economic growth.

[/ QUOTE ]

It restrains some particular parties' growth for sure.

Whether it does so for the aggregate is another matter that would require more than bare assertion.

But even if it does, this is really not of much concern for those who value freedom and do not "worship the almighty dollar" (as ACists are routinely accused of doing).

[/ QUOTE ]

Ignoring the role of government... what exactly does freedom have to do with inflation?

Re: Which currency system do you think is best?
 

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
but keeping the money supply 100% fixed does restrain economic growth.

[/ QUOTE ]

It restrains some particular parties' growth for sure.

Whether it does so for the aggregate is another matter that would require more than bare assertion.

But even if it does, this is really not of much concern for those who value freedom and do not "worship the almighty dollar" (as ACists are routinely accused of doing).

[/ QUOTE ]

Ignoring the role of government... what exactly does freedom have to do with inflation?

[/ QUOTE ]

Ignoring the bullet wound what does getting shot have to do with dying?

Re: Which currency system do you think is best?
 

Try again, since inflation isn't only caused by the government.

Re: Which currency system do you think is best?
 

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Try again, since inflation isn't only caused by the government.

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Yes it is.

Re: Which currency system do you think is best?
 

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Try again, since inflation isn't only caused by the government.

[/ QUOTE ]

Yes it is.

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Ok, this is fun.

No it isn't.