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  #21  
Old 10-25-2007, 03:17 PM
DcifrThs DcifrThs is offline
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Default Re: Fiat money can be as good as gold, possibly better...

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Credit deflation due to bank failures is not fun, of course, for the people who see their inflated savings wiped out in the bank failure, but there is no aggregate economic problem that results

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can you rephrase that or restate it b/c the way it sounds now it seems that you're saying bank failures have no negative aggregate economic impact.

is that the point you want to make?

if so i (and many others who have written papers on the subject) disagree strongly witht hat statement.

Barron

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Yes, that is exactly what I'm saying.

It's a good thing for the macro economy when bankrupt institutions are liquidated, because malinvested resources can be reallocated to productive institutions. It sucks for the people who own/are invested in/are owed by the bankrupt institution, but as long as it isn't some monopoly situation (like it's the central bank or something), then there is no aggregate problem for the macro economy.

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i see what you're saying that in the long run it is best that misallocated resources (malinvestments) clear from the market. the problem is that they don't clear in an orderly fashion.

bank failures were examined to see whether they had a macroeconomic impact during the US depression (a labratory for many of these types of questions). when banking failures were included as an independent variable explaining industrial productivity, employment, productive output, and prices it came out both powerful (large beta) and highly significant. moreso than many other indicators included in the study.

so during the "cleansing" process where malinvestments are cleared from the market, there is a period where unemployment increases substantially, output falls, prices fall, and industrial production falls. the clearing of the poor investments of banks has, at least short term, very negative consequences for the economy.

Barron
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  #22  
Old 10-25-2007, 03:29 PM
DcifrThs DcifrThs is offline
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Default Re: Fiat money can be as good as gold, possibly better...

Borodog,

we've been through this again and again. and i must say that i do agree with you in terms of many aspects of what you say. i'd venture to say i agree with most if not all of what you say.

i would like to point out though, in as kind a way as possible, that i do not think you read what i stated in one major section of your post.

i said :

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eventually the gold system as we know it today and recently cracks b/c the policy needed to avoid a devaluuation (or revaluation) is the opposite of what is "needed" for the economy.

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then i clarified:

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by "needed" above i meant when the economy slows significantly and the money supply is fixed,

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bold added.

then you responded with:

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This is false. During the 16 years from 1880 to 1896, after the US finally went back on the (FRB flawed) gold standard, the economy grew tremendously, completely outpacing the money supply; the economy grew at 5-7% annually, while prices dropped 1-2% per year. Other periods in the 1800s show the same trend, but the data is very noisy, as there were several wars, central banking schemes, and always FRB muddying up the waters.

The main thing you need to understand to debunk the "fixed money supply slows the economy" myth is theory. When productivity increases, the generally falling price level affects inputs as well, and there is no problem for firms to remain profitable. Just look at the computer industry, which has remained incredibly profitable for decades in the face of *plunging* output prices. There is no magic that prevents this from happening in all industries, rather than in only some random subset of them.



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i believe you misspoke here because i definitely never said the economy CANT grow when the monetary system is tied strongly to gold.

i know i didn't say that i believe the myth in bold above.

you then say

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The next thing to understand is that even under a 100% reserve non-FRB gold standard, the money supply is not fixed! If the economy grows faster than the gold stock, then the value of producing an ounce of gold increases, and more gold comes out of the ground. If economic growth is slower than gold production, the value of producing more ounces falls, and the marginally productive mines will be shut down. In the long run, the return on producing gold must equal the general level of return in the economy. Hence the money supply in a 100% reserve gold standard could *never* get "out of whack" with the economy.


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i've started to buy into this and agree with the logic.

thanks,
Barron
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  #23  
Old 10-25-2007, 03:31 PM
owsley owsley is offline
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Default Re: Fiat money can be as good as gold, possibly better...

But the same monetary mechanisms that we supposedly need to limit the damage of recessions and "clear out things in an orderly fashion" are the exact reason those poor investments came into existence in the first place.
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  #24  
Old 10-25-2007, 03:33 PM
DcifrThs DcifrThs is offline
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Default Re: Fiat money can be as good as gold, possibly better...

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But the same monetary mechanisms that we supposedly need to limit the damage of recessions and "clear out things in an orderly fashion" are the exact reason those poor investments came into existence in the first place.

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i understand that...but i didn't comment on that. i specifically stated what i did in the way i did (in terms of the fixed money supply when the economy has slowed) because it is what i know and can prove.

Barron
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  #25  
Old 10-25-2007, 03:36 PM
Borodog Borodog is offline
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Default Re: Fiat money can be as good as gold, possibly better...

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there is a period where unemployment increases substantially, output falls, prices fall, and industrial production falls

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That's what a recession is, by definition. It's not like you can have a recession to clear malinvestments without these things; they are the recession, and if they don't occur, the malinvestments don't clear at all. Which is unsustainable. Eventually, there is a recession, and it is ugly, but it is required to clear the malinvestments caused by artificial credit expansion.

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the clearing of the poor investments of banks has, at least short term, very negative consequences for the economy.

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They only appear to be negative to the people they impact in the short term. But that is a fall they've been set up for by the bank credit inflation; it isn't the "fault" of the recession. The recession is extremely healthy for the macro economy, because it puts a stop the ongoing waste of the factors of production and reallocates them back to profitable lines of production, which obviously takes time and there is a lot of lost capital and personal pain along the way.

This is why I had no sympathy for George Bailey in It's a Wonderful Life; he's the one that lent out vastly more money than he had on hand in his bank for interest. And then when times get tight and people want there money, it doesn't exist. [censored] George Bailey. He was evil; he plundered the citizens of Bedfor Falls and set them up to have their businesses go bust and their life savings wiped out. Clarence should have let him drown and sent his ass to Hell.

Radical enough for you? [img]/images/graemlins/wink.gif[/img]
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  #26  
Old 10-25-2007, 04:39 PM
Borodog Borodog is offline
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Default Re: Fiat money can be as good as gold, possibly better...

Barron,

You are absolutely correct. I misread it as "the economy slows WHEN the money supply is fixed . . ."

My bad, my apologies.
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