Economics Questions

Re: Fiat vs Gold, both crappy?

maxpot46 — Thu, 20 Nov 2008 20:03:15 GMT

scineram:
But economic growth due to increasing money supply is a facade. Any quantity of money is sufficient for needs of trade. How does coinage generates real wealth? It just redistributes the benefits of growth to the coiners. No?

You're correct that a gold standard would "redistribute" wealth towards gold producers without adding any consumable goods to the economy. This was Friedman's major objection to a gold standard -- that it "wasted" the productivity of some market participants (i.e. the gold producers).

However, this is a minor issue that pales in comparison to the dangers of a paper currency,which exposes the market to the dangers of inflation and theft via counterfeiting. It's easy for banks/governments to counterfeit paper; not so much gold. In fact, you could say that the prevention of credit expansion is one of the "goods" offered by gold producers.

Here's a great debate between Friedman and Mundell on this issue which is very informative.

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 19:20:04 GMT

scineram:

Why does it matter whether it is a commodity or paper money? Gold coins are not real wealth. They are simply a media of exchange just like a fiat currency. They are not consumed, only exchanged.

Also I was talking about paper notes, not credit expansion.

Don't be ridiculous, of course it matters. The whole point of this is that a people value the good that backs up money under the gold standard (e.g. gold). That's the very thing that makes the difference.

As for paper notes and credit expansion, it's not relevant.

Re: Fiat vs Gold, both crappy?

scineram — Thu, 20 Nov 2008 19:12:33 GMT

Why does it matter whether it is a commodity or paper money? Gold coins are not real wealth. They are simply a media of exchange just like a fiat currency. They are not consumed, only exchanged.

Also I was talking about paper notes, not credit expansion.

Re: Fiat vs Gold, both crappy?

Spideynw — Thu, 20 Nov 2008 17:09:02 GMT

If government gave up its monopoly on currency, and if its power to print and coin it were taken away, leaving the currency completely up to the market, then the best currencies would be those that were the most stable, that had the least inflation or deflation. So neither inflation nor deflation would be much of an issue anymore, and we would not have nearly as many "bubbles".

So I do not even know why we are worrying about deflation.

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 16:20:16 GMT

scineram:
But economic growth due to increasing money supply is a facade.

If you're talking in terms of fiat paper money, then yes. If money is a tangible good, then no.

scineram:
Any quantity of money is sufficient for needs of trade.

Who has said otherwise?

scineram:
How does coinage generates real wealth? It just redistributes the benefits of growth to the coiners. No?

Of course it generates real wealth, it increases the stock of real goods. Credit expansion doesn't.

Re: Fiat vs Gold, both crappy?

Tex2002ans — Thu, 20 Nov 2008 15:06:27 GMT

nazgulnarsil:

I understand now why my points seemed nonsensical. thank you for bearing with me.

Thank you for sticking around and actually listening to what we had to say. You are really here to learn, unlike some people who come to these boards. :)

Also, another thing I want to point out is Austrians use slightly different terms than what Keynesians use, everyone else can correct me if I am wrong (I still have much to learn as well):

Inflation = Expansion of the money supply, Deflation = Lowering of the money supply, Price Inflation = Prices rising (this is the "Inflation" that Keynesians use), Price Deflation = Prices going down.

Re: Fiat vs Gold, both crappy?

scineram — Thu, 20 Nov 2008 14:25:38 GMT

But economic growth due to increasing money supply is a facade. Any quantity of money is sufficient for needs of trade. How does coinage generates real wealth? It just redistributes the benefits of growth to the coiners. No?

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 12:10:23 GMT

scineram:
Then why not ban coinage?

Because coinage generates real wealth.

scineram:
Why cannot higher interest rates divert investment the way lower rates does?

Because people will refrain from investment due to higher interest rates. Granted, artificially high interest rates will lead to a decline in overall utility, it will not lead to the ABCT though.

Re: Fiat vs Gold, both crappy?

scineram — Thu, 20 Nov 2008 12:07:29 GMT

Then why not ban coinage?

Why cannot higher interest rates divert investment the way lower rates does?

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 11:58:32 GMT

scineram:
Yes it is

Because it's fraudulant, or implicit theft. If a private individual starting writing notes for gold that didn't exist it would be fraud. Why is it any different when the state starts printing money out of nowhere? The fact is they're creating money out of nowhere transferring wealth from the original holders of the money to whoever first receives it.

scineram:
An artificially short production process still does not reflect the time preferences of individuals. It is therefore also malinvestment.

No it won't lead to malinvestment, it will lead to a lack of investment.

Re: Fiat vs Gold, both crappy?

scineram — Thu, 20 Nov 2008 11:41:58 GMT

GilesStratton:
Yes it is.

Why is that?

GilesStratton:
Deflation can never cause the ABCT. Granted if interest rates were lower than before the length of the production process may be artificially short but that wouldn't result in the ABCT. The ABCT is caused my misallocation of resources resulting in malinvestments, which can only be caused by a lengthening of the production process that doesn't reflect the time preferences of individuals within society.

An artificially short production process still does not reflect the time preferences of individuals. It is therefore also malinvestment.

Re: Fiat vs Gold, both crappy?

maxpot46 — Thu, 20 Nov 2008 11:30:57 GMT

nazgulnarsil:
In a commodity based currency where the supply is relatively inelastic compared to the market (like with gold) a quick expansion in the markets causes deflation, there are now more goods and services available but not a corresponding increase in the amount of money in circulation making everything slightly more expensive

Which is reflected in an increase in the price of gold, which stimulates the gold production market, bringing supply into balance with demand (or as much as is possible in this world). The market self-regulates.

nazgulnarsil:
This favors people who already have large amounts of money and acts as a brake on economic expansion

Yes, the good kind of brake, the one that prevents "expansion" into inefficient lines of production. You call it "economic expansion"; others call it "rent-seeking" (or "theft" if they're not good with fancy economic terms).

nazgulnarsil:
So how do we get the best of both worlds? How do we get a currency that won't fluctuate in value but will maintain its buying power despite swings in market growth?

You're chasing a chimera. There is not, nor will ever be, a stable currency, because demand for money (in fact, for all goods and services) is unstable, unpredictable and uncontrollable.

You would be well served by reading The Theory of Money and Credit by Mises.

Re: Fiat vs Gold, both crappy?

nazgulnarsil — Thu, 20 Nov 2008 10:31:11 GMT

But I think you have to admit that HTF in relation to XCR will definitely affect the ABCDEFG. :p

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 10:23:37 GMT

scineram:
First, inflation is not theft.

Yes it is.

scineram:
Second, with deflation the uneven change in prices leads to relative prive distortions, tinkers with the interest rate, causes economic cycles, according to ABCT.

Deflation can never cause the ABCT. Granted if interest rates were lower than before the length of the production process may be artificially short but that wouldn't result in the ABCT. The ABCT is caused my misallocation of resources resulting in malinvestments, which can only be caused by a lengthening of the production process that doesn't reflect the time preferences of individuals within society.

Re: Fiat vs Gold, both crappy?

hayekianxyz — Thu, 20 Nov 2008 10:20:53 GMT

nazgulnarsil:
Isn't this a problem since those who hoard wealth benefit proportionately more?

All hoarding does is to raise the PPM of the money that is still in the economy (for lack of a better term). Moreover hoarding is just the satisfaction of human desires, there is nothing different in this respect to spending.