Which currency system do you think is best?

[tomdemaine]

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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...

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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.

[tomdemaine]

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?

[DcifrThs]

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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

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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?

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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

[pvn]

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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).

[Moseley]

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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.

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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.

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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.

[xorbie]

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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).

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

[tomdemaine]

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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).

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

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

[xorbie]

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

[tomdemaine]

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

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Yes it is.

[xorbie]

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

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Yes it is.

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Ok, this is fun.

No it isn't.