[DcifrThs]

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say we have cummulatively produced, as an economy (i.e. the gold industry) some amount of gold G. G is now the total money supply. every year the economy grows by Y and productivity increases by P so G should grow by Y-P. so lets let g=Y-P.


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I still don't understand where this should comes from. I fully admit that despite doing an economics degree I'm relatively dense about this stuff but if you take away the assumption that deflation = bad (which I think there are pretty good arguments for doing) then there is no "should" to the amount of money in the economy, just like there's noone saying there should be X number of trainers produced per year.

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first off, change G from gold to something much easier to produce that could grow quickly if effort was put to it...say wheat (could stop planting other stuff and plant wheat).

now the *should* comes from the economy producing at potential. potential is the highest rate of growth that can be sustained indefinitely (or for the long term).

in order for the economy to produce at this rate, there cannot be a fixed money supply. i think we've convinced you of that.

now what does that imply about the money supply...it implies that it has to grow. but by how much should it grow?

well, to maintain the potential GDP levels on average it should grow by the amount that the economy grows in real terms (ignoring productivity for now. but overall, since increased productivity increases output potential by allowing more growth with the same resources, it should be subtracted from potential GDP).

anything less than this would produce deflation if that state was kept for a long period of time (consistent money growth of less than trend GDP growth would produce deflation).

similarly, anything more than that would, int he long run, produce "too much" inflation.

so the *should* comes from the fact that in my mind at least, we should all want to grow at potential GDP, or as close to it as possible without producing either large inflation or deflation.

Barron