Fiat money can be as good as gold, possibly better...

[tomdemaine]

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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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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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OH NOES not lower prices!!!

[vulturesrow]

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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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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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OH NOES not lower prices!!!

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Wow, you totally got me there. NH sir, well played!

[Borodog]

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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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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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Biggest myth in economics.

http://ideas.repec.org/p/nbr/nberwo/10268.html

There is no empirical link at all between deflation and depression, which matches what the Austrians have said ever since the Great Depression itself.

The only kind of deflation that casues economy-wide problems is sudden, so-called confiscatory deflation, which is an endogenous policy created by central governments, such as happened in Argentina. 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. And there is certainly no problem at all with growth deflation of consumer prices; in fact it's great. That's how a growing economy makes consumers wealthier.

The REAL problem with deflation is that it wipes out the existing inflationary financial institutions that created the problem in the first place. THAT is why we have to be constantly plied with the deflation boogeyman.

[DcifrThs]

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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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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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no, it's not that either.

monetary policy flexibility (assuming it is used correctly) in times of trouble leads to shallower recessions/depressions.

this was empirically tested very thoroughly. moving off of the gold standard was the best indicator for improvement of output, production, employment etc. during the great depression in every single country. those countries that exited the gold standard sooner recovered better. those that held on longer, took far longer to come out of the depression. there is tons more here but that is the overall conclusion fo every study conducted on it that i'm aware of.

the main issue i see here is that govt's (or anybody "administering") a gold standrad then ties its hands in terms of its ability to maneuver through troughs in the business cycle.

by "needed" above i meant when the economy slows significantly and the money supply is fixed, the mechanism for the market clearing hurts a ton more now than it could if lower interest rates were introduced.

again, this is empirically tried and tested and i've linked this all before.

the only issue is what is meant by "gold standard"... because if a govt (or any authority) wants to preserve its place int he "hearts and minds" of its people, allowing them to suffer is a surefire way to not accomplish this goal.

specifically, a govt will always (and has always in every situation ever recorded) chosen a shallower recession (i.e. a loosening of monetary policy via devaluation of gold or removal of gold as a peg, or revolkation of a promise to hold a peg to another currency) vs. holding onto a peg (be it to gold or another currency) and allowing the economy to suffer as a result.

Barron

[DcifrThs]

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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

[Zygote]

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the main issue i see here is that govt's (or anybody "administering") a gold standrad then ties its hands in terms of its ability to maneuver through troughs in the business cycle.


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This completely ignores what causes the business cycle.

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by "needed" above i meant when the economy slows significantly and the money supply is fixed, the mechanism for the market clearing hurts a ton more now than it could if lower interest rates were introduced.

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Hurts a ton more now, but what is the long run effect and how does any measure not prop up the disease while merely taming the short term symptoms?

You can't fire with fire.

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the only issue is what is meant by "gold standard"... because if a govt (or any authority) wants to preserve its place int he "hearts and minds" of its people, allowing them to suffer is a surefire way to not accomplish this goal.

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I think you're thinking of the hearts of mind of those who benefit from cheap money.

[Zygote]

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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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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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OH NOES not lower prices!!!

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Wow, you totally got me there. NH sir, well played!

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http://www.mises.org/mp3/BBFuture/BBF03.mp3

pay attention to the differences between benign and malign deflation.

[Zygote]

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I've seen this asserted before but never satisfactorily explained. Can you more specifically explain what you mean by this?

I can only think of one way a nation's productive economy can be said to "back" a currency in the way, say, gold does. The citizens are obligaed to accept the notes for the things they produce. But isn't this another way of referring to what you called the "decreed aspect of government paper". Prior to now I have believed that decree is the only thing giving the paper value, and unless you can tell me what you mean by "the economy backs it" I will be forced to continue so.


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The decree is the only thing that gives value. I should have made more clear that my ideas about fiat money assumed the decree is entirely and thoroughly enforced without costs.

[Borodog]

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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.

[Borodog]

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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.


[/ QUOTE ]

Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

[/ QUOTE ]

Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.

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no, it's not that either.

monetary policy flexibility (assuming it is used correctly) in times of trouble leads to shallower recessions/depressions.

this was empirically tested very thoroughly. moving off of the gold standard was the best indicator for improvement of output, production, employment etc. during the great depression in every single country. those countries that exited the gold standard sooner recovered better. those that held on longer, took far longer to come out of the depression. there is tons more here but that is the overall conclusion fo every study conducted on it that i'm aware of.

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The "gold standard" as advocated by people like myself is emphatically not what was in place at the beginning of the Great Depression. In fact it has never been in place, although it came closest in the 1840s (but there was still FRB to [censored] it up).

The creation of the Federal Reserve in 1913 led immediately to a massive inflation of the money supply to fund WWI, and led to the recession of 1920-21. The money supply was again massively inflated in the 1920s in the name of "price stability". The 1920s was a time of exploding productivity, and the money supply had to flow like water to keep prices stable, setting the stage for deep recession via mechanisms I've described elsewhere. Bank failures had wiped out about a third of this inflated money by 1933, but Hoover's crazy policies of maintaining high prices and wages in the face of a greatly deflated money supply had prevented the economy from recovering. The we got FDR, who took Hoover's policies and ratcheted them up by a factor of 100, and what should have been a sharp, short recession to correct the inflation-driven malinvestments of the 1920s became a decade long orgy of impoverishment and capital destruction.

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the main issue i see here is that govt's (or anybody "administering") a gold standrad then ties its hands in terms of its ability to maneuver through troughs in the business cycle.

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The business cycle is *caused* by inlation in the first place. If you wanted the business cycle to vanish overnight, put the country on a 100% reserve commodity standard and outlaw fractional reserve banking.

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

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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.

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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the mechanism for the market clearing hurts a ton more now than it could if lower interest rates were introduced.

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Lower interest rates are not some magic salve. The interest rate is a price, and fixing the price of capital below the market clearing price has all kinds of deleterious effects, just like fixing any other price. When you fix the price of capital too low, it is misallocated, just like if you fixed the price of milk too low people would be taking baths and milking their lawns instead of watering them, fixing the price of capital too low causes people to misallocate it to lower valued production processes. The lowered interest rate drives a wedge between savings (which drops because people can't get as high a price for defering consumption) and investment (which increases because people believe they can service their debt more cheaply). This causes real resources to be malinvested, wasted. I.e. the demand for real physical capital increases, but less physical capital is supplied. Just like any price capping scheme this creates a shortage that gets worse over time, and will eventually be revealed when either the central bank turns of the money spigot, or input prices have been bid up so high that the money spigot can no longer paper over the unprofitability.

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again, this is empirically tried and tested and i've linked this all before.

the only issue is what is meant by "gold standard"... because if a govt (or any authority) wants to preserve its place int he "hearts and minds" of its people, allowing them to suffer is a surefire way to not accomplish this goal.

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Governments don't care about the suffering of their people; they only care about having the appearance of caring about the suffering of their people. That's all they need to keep themselves in power. To that end they produce no end of propaganda and employ an endless stream of court apologists to weave the propaganda that allows them to plausibly do things like install themselves as the monopolist of counterfeiting.

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specifically, a govt will always (and has always in every situation ever recorded) chosen a shallower recession (i.e. a loosening of monetary policy via devaluation of gold or removal of gold as a peg, or revolkation of a promise to hold a peg to another currency) vs. holding onto a peg (be it to gold or another currency) and allowing the economy to suffer as a result.


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Governments always choose to create the *appearance* of a shallower recession by trying to paper it over by printing money. But all this does is begin the cycle of malinvestment over again, setting the seeds for the next recession. But hey, that's going to happen during the next administration, so who cares?

If you really want to know what a healthy recession looks like, a recession that cleans out the malinvestment, but is not papered over but a ream of government interventions and new money, look at the recession that Martin van Buren inherited, the Panic of 1837. This recession was caused by the rapid inflation of the money supply caused first by the 2nd National Bank of the US and then by "wildcat" banks that sprang up after Jackson killed the 2nd National Bank in 1833.

During this recession, a quarter of banks failed and the money supply dropped by a third, almost identical to the beginning of the Great Depression 90 some years later. Van Buren did absolutely nothing. Prices and wages were allowed to fall. What happened during this "depression"? Productivity went *up*, and because of this BOTH real consumption and real savings went up. The only thing that went down was *investment*, which is exactly what a malinvested economy needs. From a macro economic perspective, and the perspective of most of the population (who weren't wiped out by the failure of FRB banks), the "Panic" of 1837 not only was a painless recession, it was a downright economic *boom*. Now, of course, there were a LOT of people that got harmed, but that's because of the malinvestment and the banks, not the recession needed to correct it all.