# Think Tank > Austrian Economics / Economic Theory >  Austrian Vs. Chicago

## limepickle

What are everyone's thoughts on having a gold standard as opposed to having
money supply increase with growth? One problem I anticipate with a gold
standard is that prices will go down (good), but wages will also want to go down
and this will cause confusion and panic. I think that when I wake up, my dollar should
be a dollar, not 1 cent. On the other hand, I don't think that my dollar should be worth
100 dollars either, like it would be under a gold standard.

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## Cabal

What does it matter how many 0s you see on your paycheck if the money is worthless?

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## limepickle

It's not a matter of zeros on the check. If money supply increases with growth, prices stay the same, but under a gold standard, prices have to adjust down and this takes time. I prefer a system where there is a lot of stability in the value of your dollar. So 10 dollars should be 10 dollars, but this will not be under a gold standard

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## Cabal

> It's not a matter of zeros on the check. If money supply increases with growth, prices stay the same, but under a gold standard, prices have to adjust down and this takes time. I prefer a system where there is a lot of stability in the value of your dollar. So 10 dollars should be 10 dollars, but this will not be under a gold standard


This is proven false, as prices have not stayed the same. Furthermore this requires central planning and control of the money supply, and manipulation thereof. This is also a historically proven failure, and facilitator of corruption and the business cycle. Moreover, this is a system of coercion where the central planner gets to artificially determine the value of your property and wealth without your consent; and violence is required to keep competing commodity-backed currencies out of the market. 

The statement $10 should be $10 doesn't even make sense. $10 is $10. You seem to be confusing $ value with purchasing power.

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## Sola_Fide

> What are everyone's thoughts on having a gold standard as opposed to having
> money supply increase with growth? One problem I anticipate with a gold
> standard is that prices will go down (good), but wages will also want to go down
> and this will cause confusion and panic. I think that when I wake up, my dollar should
> be a dollar, not 1 cent. On the other hand, I don't think that my dollar should be worth
> 100 dollars either, like it would be under a gold standard.


...




> "Declining prices do not call for contravening central bank maneuvers that hopefully stabilize prices. Actually, whether the given stock of money is large or small, it renders the desired exchange service. The popular notion that an increase in the stock of money is socially and economically beneficial and desirable is one of the great fallacies of our time. It has lived on throughout the centuries, embraced by kings and presidents, politicians and businessmen. It has shattered numerous currencies, inflicted incalculable harm, and caused social and political upheavals. It springs forth, again and again, no matter how often economists may refute it."  
> 
> -Hans Sennholz

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## FreeTraveler

This is one of the easiest economic fallacies to destroy. That it still hangs around amazes me.

High-tech prices have been declining for decades. Contrary to theory, it's one of the most dynamic segments of the economy.

Deflation, the dollar gaining in value over time, is a sign of increasing productivity, not a boogieman as the paper-money freaks would have you believe.

Deflation is only a problem in a debt-based fiat-money economy. Which is why it's important it be sold as a boogieman.

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## Diurdi

Deflation can also occur as a result of a credit contraction.

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## limepickle

Sorry you guys are confusing manipulation of the money supply with increase of the money supply. I'm not suggesting that deflation is an indicator of economic decline. The growth happens regardless, but different money standards reflect how growth happens. The title is "Austrian vs Chicago," not "Austrian vs Keynesian." So think "Hayek vs Friedman;" it's a very pointed and limited argument. Prices have increased because Keynesians follow a policy of increasing money supply beyond growth.

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## Bruehound

The Chicago School believes you can measure and make quantifible the macro of "growth". The fallacy lies in that impossbility to collectively define what is a cumlmination of an infinite number of individual decisions. All pricing is based on relative scarcity so it is a constantly moving target. It is also, for the same reasons, impossible to apply a meaningful definition to "price inflation" as every individuals "market basket" is uniquely comprised.

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## limepickle

Fair enough but if I see that Real GDP has increased by a certain amount, and I increase money supply by that amount, prices will generally be more stable than if I left it to the gold standard. Of course they won't be perfect, but they can be pretty close year to year. On the other hand, under a gold standard, prices will all go down, and then employers have to adjust wages; and it causes a lot of confusion, conflict, and time.

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## Cabal

> The title is "Austrian vs Chicago," not "Austrian vs Keynesian." So think "Hayek vs Friedman;" it's a very pointed and limited argument. Prices have increased because Keynesians follow a policy of increasing money supply beyond growth.


Austrians consider Chicagoans as "soft Keynesians" for good reason. To control the money supply you still need fiat money, you still need a central bank, and you still need a State initiating violence; and to suggest that the Chicago school can do a better job at manipulating the money supply than Keynesians is just wishful thinking.

One of the very foundations of a market economy is the currency used in that market economy. If that currency is controlled, it is not a free market. 

All of this is rather irrelevant. The goal is not to design the best theoretical consequences; the goal is liberty. For example, if slavery still existed, Austrians wouldn't be concerned with what happens after slavery is ended; the point is that slavery needs to end.

Fiat currency, central planning, and big governments always inhibit liberty. The more fiat currency there is, the more war there is. The more central planning there is, the less free the market is. Both of these things feed and spawn from central government, and the bigger the government is, the more oppressed people and markets become.

http://www.lewrockwell.com/rothbard/rothbard43.html

"...a statist is a statist."

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## Diurdi

> Fair enough but if I see that Real GDP has increased by a certain amount, and I increase money supply by that amount, prices will generally be more stable than if I left it to the gold standard. Of course they won't be perfect, but they can be pretty close year to year. On the other hand, under a gold standard, prices will all go down, and then employers have to adjust wages; and it causes a lot of confusion, conflict, and time.


Well the gold supply also inflates as more of it is mined (assuming it's not consumed faster, which normally isnt the case).

Second, why do prices need to be stable? Some prices need to rise, some need to fall - due to supply & demand. If prices in general are going one direction or the other shouldn't be of any concern in itself. Perhaps the reason why the prices are rising (e.g. lots of products destroyed, lower productivity etc) is a concern, but that the price is rising is a feature and not a fault. 

The prices rise because there are less products around, which calls for lower consumtion.

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## TheNcredibleEgg

Instead of increasing the money supply with growth - what about increasing the money supply based solely on population growth?

Fiat standard. No Fed. The Treasury simply prints additional dollars to coincide with population increases. Usually between .5% and 1% per year.

Prices should remain stable - declining with innovation/productivity gains. Increasing occasionally based on shortages or increased regulatory demands.

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## limepickle

To Cabal as well: Supply and Demand changes will happen- that's fine. But the currency itself should not be determining the price. If the price of milk goes down because of a dairy cow surplus, that's fine and great, but if the price of milk goes down because of the money supply being stagnant in relation to the supply of milk, that's not okay. What I'm basically saying is that Austrians believe in price fixing- fixing the price of gold. Chicagos are not at all Keynesians- Keynesians believe in using money supply as a tool for stimulus- Chicagos just believe in growing it. I understand what you are saying Cabal, but there are ways to increase money supply without a central bank.

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## Jingles

> Fair enough but if I see that Real GDP has increased by a certain amount, and I increase money supply by that amount, prices will generally be more stable than if I left it to the gold standard. Of course they won't be perfect, but they can be pretty close year to year. On the other hand, under a gold standard, prices will all go down, and then employers have to adjust wages; and it causes a lot of confusion, conflict, and time.


But by doing this all you are really doing would be manipulating prices in form. Price signals are very important for businesses, people, entrepreneurs, etc, etc, etc... When you manipulate them in some form there will always be some form of misallocation of resources, shortage, overproduction of some good, etc... We want all resources to be used as efficiently as possible and for this to occur you need to the truest representation when it comes to prices. When you manipulate prices (even if its in the manner you are suggesting) you are manipulating with supply and demand. Just because prices fall does not mean employers cut wages or something similar. It doesn't matter what the supply of money is. Its about purchasing power. We want to maximize purchasing power. We don't want to stabilize any economy, we want it to grow, prosper, advance technology, create the most goods and services for people.

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## The Gold Standard

> What I'm basically saying is that Austrians believe in price fixing- fixing the price of gold.


What are you talking about? Austrians don't want to fix the price of anything. Most Austrians don't want a gold backed paper currency. They want to be allowed to transact in whatever they want. 

As for your argument, the only drawback to declining prices is that there will be confusion and animosity when wages have to fall? That is a good thing. It is part of the reason that wages would never fall faster than prices, which is why truly sound money allows for the greatest increase in the standard of living. If prices fall 5% and wages fall 2%, everyone is better off.

Printing money to keep up with some fantasy economic growth statistic robs everyone of this increase in standard of living.

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## Jingles

> What are you talking about? Austrians don't want to fix the price of anything. Most Austrians don't want a gold backed paper currency. They want to be allowed to transact in whatever they want. 
> 
> As for your argument, the only drawback to declining prices is that there will be confusion and animosity when wages have to fall? That is a good thing. It is part of the reason that wages would never fall faster than prices, which is why truly sound money allows for the greatest increase in the standard of living. If prices fall 5% and wages fall 2%, everyone is better off.
> 
> Printing money to keep up with some fantasy economic growth statistic robs everyone of this increase in standard of living.


Exactly, couldn't have said it better myself.

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## Steven Douglas

> If prices fall 5% and wages fall 2%, everyone is better off.


Not lending institutions, you selfish git. Think of all the lending institutions and how bad this would be for them. Where is your compassion? Privately accumulated capital would then compete, quite unfairly I might add, against loans. And if prices fell, loans and the interest due would be still have to be repaid in deflated money, making loans so monstrously expensive it wouldn't even make sense to get a loan - unless the interest was really, really low.  

Starving bankers?  THAT'S YOUR IDEA OF EVERYONE BETTER OFF? 

No, this is as ridiculous as allowing automobiles to compete with farriers, wagoners and wheelwrights - all of whom were starved to death by the millions lots and lots I'm sure.

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## crhoades

Check out skousen's Vienna & Chicago. Friends or Foes.  A tale of two green market economics. http://www.amazon.com/dp/0895260298/..._am_us?ie=UTF8

Wouldn't say this is 100% on the side of Austrian school but pretty fairly represented most things.

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## limepickle

You guys are confusing the product market with the money market. Supply and demand change in the product market, and that's fine; this is how businesses get signals. The money market is completely independent. The purchasing power argument is moot, because if you make the assumption that wages will fall less than prices under your ideal currency, then that is equivalent to prices staying the same and wages increasing in my ideal currency. I understand that Austrians want competing currencies, but we are arguing which of these currencies would be better. Austrians seem to lean toward a hard money standard, in this gold, and that means fixing the price of gold. The way the money market works is that when we become more productive, we demand more money, and if we demand more money, someone is supposed to supply a larger quantity of money. Gold can not be mined forever to match this need for increase, so eventually under a gold standard, you force the market to adjust prices down. This is all fine, but what is the point of this when there is another system that avoids this confusion? The Chicago System maintains purchasing power exactly the same as a gold standard- it just avoids all the confusion.

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## limepickle

And I should add that in a free market, wages don't beat out prices unless the workers produce more value in some way. If wages don't fall as much as prices and the only reason is because of hard money confusion, you should expect layoffs

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## Jingles

http://wiki.mises.org/wiki/Business_cycle

http://wiki.mises.org/wiki/Austrian_...s_Cycle_Theory

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## Steven Douglas

> And I should add that in a free market, wages don't beat out prices unless the workers produce more value in some way. If wages don't fall as much as prices and the only reason is because of hard money confusion, you should expect layoffs


In a truly free market, for those wage earners who did not want to acknowledge that relative values really have changed, layoffs would be well deserved in many cases. The reason - _all prices fall_, not just wages, which means that a cut in wages will not necessarily result in _any damage whatsoever_ to the cost of living of a wage earner.  Any wage earner's refusal to take a pay cut would be tantamount to an _expectancy of an automatic pay raise_, and an advantage to the wage earner who gets the short term advantage of that raise until a new wage can be negotiated...which is what we have now anyway, albeit with the horse before the cart. 

We have a situation now where inflation is the [absolutely and completely artificial] rule, and it is FULLY expected that wage earners will "ultimately" require more wages this year than last.  And any firm's slowness or reluctance to adjust wages upward, and refusal to acknowledge that relative values have changed, is tantamount to an _expectancy of an automatic pay cut_, given that the same wage can now be payed in devalued money, which DOES DAMAGE the wage earner until a wage adjustment is finally negotiated.  

Either scenario can result in layoffs, and even for the same reason (workers did not produce more value in some way).  That has NOTHING to do with either regime.  The only REAL difference is that under a free market the wage earner is sitting in a position of advantage - as they are often the LAST to adjust to the effects of DEFLATION - which really does favor both savers and wage earners over debtors and "firms".  For the individual entrepreneur, _prices are wages_, so it is a wash. Their prices must fall in order to compete, and they know this - which means that their wages fall automatically as a result - without any effect on their profitability in terms of real value.  Under the current non-free market system, wage earners are the LAST ones to adjust to the effects of INFLATION, which they feel most of all, which makes them the ultimate losers, disadvantaged by default - and all so that a credit/debt system which deliberately taxes and punishes savers, while catering to firms FAR more than individuals, can proliferate and expand.

What NEITHER scenario examines is the fundamental difference between the two.  Under an inflationary regime like the one we have now, constant inflation is MANDATORY for the system to survive.  It can NEVER stop expanding. Under a sound money system, one that tolerates no inflationary practices, deflation is NOT infinite.  There is a natural floor.  Prices NEVER fall to zero, because both wages and real commodities ALWAYS have some real value. There is no such thing as "deflating" these to the point where they can be exchanged for virtually nothing.  Rid the system of artificial inflationary practices, and even wages will ultimately stabilize in value (i.e., no massive swings either way) like anything else.

Deflation under a truly free market is really a quite natural way of punishing those whose practices are indeed inflationary.  The argument that "layoffs could result" is a very obnoxious obfuscation that holds up wage earners as human shields - because the real cause of deflation in most cases has nothing to do with those who might find themselves subject to layoffs.

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## outspoken

I wish Milton Friedman were alive today to comment on the current system.  He was a man among boys in the economics world... but a Chicago school of thought at heart.  Maybe he didn't understand or was exposed enough to the Austrian tract of study?  we'll never know but the tract we are on does not look promising at all!!

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## limepickle

Your whole argument is against Keynesian inflationary wages. CHICAGO IS NOT THE SAME AS KEYNESIAN. Let's try this one more time. Assuming that a worker is no more productive:
1. Under a Keynesian System, workers' wages increase, and prices increase. Purchasing power could stay the same, but what we see is that the money is directed toward larger institutions whose purchasing power increasing at the expense of everyone else. But theoretically, purchasing power could stay the same i.e. if you gave everyone in the world a 100 dollars, purchasing power would stay the same.
2. Under a Hard Money System, workers' wages decrease, and prices decrease. Purchasing power remains.
3. Under a Chicago System, workers' wages stay the same, and prices stay the same. Purchasing power remains.

My argument with regard to wages was that workers don't like seeing wage reductions, so under Scenario 2, what a firm would likely do is keep the same wage and layoff workers rather than decreasing for all. Unions exist in a free market, and we have to acknowledge that in reality, a firm will have difficulty cutting wages across the board and will instead layoff workers. 

At no other cost, this dilemma is completely avoided by pursuing Scenario 3. We avoid the upward price spiral of Keynesian Economics, and we avoid the dilemma of false unemployment from Austrian Economics.

Writing off Chicago and monetarism as Keynesian is a blatant mistruth. You're failing to recognize that there is an obvious difference in principle of why money supply should be increased, and you're failing to recognize that inflation and deflation are both distortions of the free market. A true free market has neither inflation nor deflation (in regards to money. Of course it will have inflation and deflation due to other things in the product market).

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## low preference guy

> At no other cost, this dilemma is completely avoided by pursuing Scenario 3.


This position is IDIOTIC because it rests on this assumption: Politicians can be trusted.

If the government runs the monetary system, politicians can easily tweak it at any given moment. That's why the only situation that will create lasting prosperity is THE COMPLETE SEPARATION OF GOVERNMENT AND THE MONETARY SYSTEM.

Moreover, if we had a monetary system based on gold for years, people will realize that their real wages are increasing despite the decrease in their nominal value. It's a concept that can be explained very easily. People are not as stupid as you think they are.

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## IDefendThePlatform

> Writing off Chicago and monetarism as Keynesian is a blatant mistruth. You're failing to recognize that there is an obvious difference in principle of why money supply should be increased, and you're failing to recognize that inflation and deflation are both distortions of the free market. A true free market has neither inflation nor deflation (in regards to money. Of course it will have inflation and deflation due to other things in the product market).


I think we have different understandings of what a true free market is. Government coming in and stating that x number of paper strips will be considered money is not a free market. Money needs to be free, it's half of every transaction. Remove the taxes and restrictions on commodity based money and any ideas about trying to "set" a certain supply of it will fade away. 


Also, I love a good debate but I'm not sure what you expected to happen when you came on the website of the country's most famous Austrian economist and started promoting that monetary socialistic Chicago junk. Just saying.

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## limepickle

low preference guy,
How exactly is a gold standard completely removed from government? Who holds the gold reserves? Who has the power to end the gold standard? When we had a barter system, there was only ONE MAJOR problem, and that was that it was difficult to trade. I believe that we should solve that ONE problem, not create more problems. Over the course of history, gold is supposed to increase in value. We can not produce gold like we can milk, apples, or other products. There are commodities and there are products; the productive world is just that- productive. If in a barter system, a bushel of apples was worth an ounce of gold and 30 years later it takes 3 bushels of apples to buy an ounce of gold, why are we setting our dollar to the gold rather than the bushel? The gold is just a commodity; all of the stuff that we transact with is productive; we don't need to use money to represent gold. Gold represents itself.
IDefendThePlatform,
Then why is it a free market for the government to "set" the price of gold? Who said that we should tie our dollar to commodities rather than productive goods? The productive goods are what we deal with; money serves the purpose of making trade easier and more efficient. It makes more sense for it to represent what we trade most. So if you want competing currencies, that's fine. I'll tell you which one wins, and it's not hard money. I expected a good debate too, but instead I got people referring to monetarism as "monetary socialistic Chicago junk." Yeah I suppose Milton Friedman was a socialist too. What a joke

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## kuckfeynes

> I understand that Austrians want competing currencies, but we are arguing which of these currencies would be better. Austrians seem to lean toward a hard money standard, in this gold, and that means fixing the price of gold.


Nothing is fixed. Everything is dynamic.




> Gold can not be mined forever


That's what silver's for.

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## low preference guy

> low preference guy,
> How exactly is a gold standard completely removed from government? Who holds the gold reserves?


You're not even barely familiar with the Austrian position you're arguing against. The free market monetary system works as follows: The government does nothing about the monetary system except for what it does in every other area: protect private property and enforce contracts.

Who holds gold? Anyone who mines it or buys it.

Recommended reading:

A Free-Market Monetary System by Friedrich A. Hayek




> I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else.

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## Steven Douglas

> I wish Milton Friedman were alive today to comment on the current system.  He was a man among boys in the economics world... but a Chicago school of thought at heart.  Maybe he didn't understand or was exposed enough to the Austrian tract of study?  we'll never know but the tract we are on does not look promising at all!!


As a monetarist, one thing Milton Friedman did not do, ironically, was question the very premise of an infinitely expanding fiat monetary system.  All of his criticisms accepted this as a purely "positive" norm (i.e., "That's just how it is. The positivist in me cannot say how it "should" be, so let us instead examine it, unchallenged, from there.") 

Thus, a "necessarily" infinitely expanding system is accepted, and can be seen as merely "positive" and not a normative conclusion, especially as underpinned and fortified by the central Keynesian tenet of the so-called "Paradox of Thrift" - which is a nice trick, if you buy into the original premise as being somehow "positive" only.  

Once the premise is sanitized as "positive only" and swallowed, the question is never whether such a system is even required - that is already axiomatically and positively accepted in advance ("what is") - leaving _only_ questions of degrees to which a given input will produce a predicted result when applied.  

This made Friedman's approaches tantamount, in my mind, to a Ponzi scheme bookkeeper who says, "I don't make rules, and I don't have to agree with what anyone does, or why they do it.  My job is to describe it all accurately, and hopefully in a way that is accurately predictive." And he could. Brilliantly. And in strictly positive terms.  And so f-ing what?  

In "A Monetary History of the United States," Friedman laid blame for the Great Depression squarely at the feet of the Federal Reserve.  According to Friedman, the Fed’s negligence in not wielding its tremendous credit and currency expanding powers caused a severe contraction in the money supply that wiped out "purchasing power" and caused massive unemployment, which in turn caused the Great Depression, which made conditions ripe for the New Deal that was spawned, and which changed American politics forever. 

Well. How nice.  

While Friedman spanked the Fed for _only one of its roles_ in creating the Great Depression, Ben Bernanke’s mea culpa was tantamount to acceptance of Friedman's *backhanded endorsement of the Fed’s legitimacy*. The clear implication was that the Fed was in fact in its "rightful" place (always implied, never questioned, let alone stated), and that it had a legitimate job to do, but simply failed to do it. 

It is no wonder to me that Bernanke would, in turn, lick the then 90 year-old Friedman's rear end with such tongue-lavishing praise:

*Bernanke:* "Among economic scholars, Friedman has no peer. His seminal contributions to economics are legion, including his development of the permanent-income theory of consumer spending, his paradigm-shifting research in monetary economics, and his stimulating and original essays on economic history and methodology. "

Is there any higher praise than that? Friedman looks like he's castigating the Fed - and the Fed gets to take a bunch of absolutely meaningless "lumps", in exchange for a ringing endorsement of the premise that caused the Fed to come into existence to begin with!

My question to Milton Friedman, were he alive today, "So, George, just how did it feel to finally shake hands with Mr. Potter?"

You could ask Friedman (et al), "What would be the economic effects of X?" as pertains to what can be positively, accurately, and arguably described as a Ponzi scheme.  They can (and do) actually entertain such questions, as cold as scientific and financial calculators, and in strictly positive terms.  Papers and books are authored on such questions, all rigorous and scientifically valid, of course, as we focus on "the test of the theory", and the efficacy of the predictive usefulness of one particular methodology versus another. And *never* would the question be entertained, "Does it really matter what we predict, when all we are talking about is a Ponzi scheme?"

No. That would be normative, doncha know. Silly Billy.

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## low preference guy

> Yeah I suppose Milton Friedman was a socialist too. What a joke


Do you think withholding taxes are a free market idea? Obviously not, so while it might be debatable whether Friedman was a statist, it's not an argument that can be taken as a joke.

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## low preference guy

> When we had a barter system, there was only ONE MAJOR problem, and that was that it was difficult to trade. I believe that we should solve that ONE problem, not create more problems.


Barter? Is your question even in the correct thread? Oh, I see, you hold the assumption that if the government doesn't do something, it wouldn't be done. If the government doesn't have a monopoly on money, there would be no money. What a laughable idea.

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## Steven Douglas

> My argument with regard to wages was that workers don't like seeing wage reductions, so under Scenario 2, what a firm would likely do is keep the same wage and layoff workers rather than decreasing for all. Unions exist in a free market, and we have to acknowledge that in reality, a firm will have difficulty cutting wages across the board and will instead layoff workers.


I challenge the assertion that there is something wrong with laying off workers, let alone those whose "wages are difficult to cut", and I DO NOT CARE that "workers don't like seeing wage reductions", any more than I should care that firms don't like to see price reductions. That is perfectly normal in both cases, and there is a natural dynamic to all of it - why this need to manipulate an entire economy because of reductions that one particular sector of an economy "doesn't like to see"? 

In all this lunacy, this society-manipulating idiocy, which focuses too much on "labor vs. capital" (as if that was somehow encompassing?), you left out one of the real losers in _either scenario_ - the self-funded entrepreneur who employs NOBODY, but is both a capitalist and a wage earner at the same time, who funds himself from privately accumulated capital (savings), IS NOT IN DEBT, and does NOT engage in debt/credit instruments.  S/he has to suffer from a deliberate currency manipulation so that firms won't have to break the news to workers who don't deserve a default increase in pay but also don't like seeing wage reductions?!  *SCREW BOTH OF THEM - WORK IT OUT.* Their little sandbox fight is NOT the entire world and we are not _"in it together_". 

And unions under a free market? Now there's a blatant contradiction of terms.  Unions don't just want collective bargaining power, which I could support in theory - many want that power to artificially extend to a right to interfere with a firms' ability to bargain with SCABS free market labor competition, and vice versa - among other collectivist compulsory powers against individuals.  

How about we stipulate instead that unions will exist _despite an otherwise_ free market? That would be more accurate, I think.  

*In my view:* 

The Federal Reserve, deficit spending by government, and fractional reserve lending by banks, all of which are inflationary, harm individuals as well as the entire currency by dilution - and especially wage earners, by taxing their savings and placing them in a position of AUTOMATIC PAY CUTS every year - which are damaging to them until they finally renegotiate their wages to adjust.  And they are always the last to adjust. 

On the other hand, an "Austrian-style" free market (absent inflationary practices) would see deflation that would cause needed "short-term" adjustments to those pesky "sticky wages" - until, that is, the market itself finished deflating (i.e., flushing all its nasty inflation out of its colon).  Unlike artificial inflation, natural deflation is not, of necessity, *infinite* - it does have a "rock bottom", because goods and services have "real value", and it is IMPOSSIBLE to deflate them to zero, unlike worthless fiat currencies, which can (and all are eventually) _inflated to zero_.

Proponents of the Chicago school think this is merely a matter of "making" wages and prices stable, so that firms and laborers have nothing to fight over. Forget whether that can even be done, they are proposing an artificial economy-wide solution to what is, in many cases, _a localized phenomenon_ (regardless how seemingly widespread). 

I don't care if a union comes in and demands a pound of flesh from a firm, or that either can cause unemployment and layoffs, or even if a Union OR a Firm can become so nasty that it causes the firm - and all the jobs it provided - to CRASH AND BURN.  That is NOT something EVERYONE should even care about.  Let them find a localized solution to their decidedly localized problem - or, let them kill each other, because they are NOT the whole economy, and if both are taken out of the picture completely, all it will do is create a NICE, WONDERFUL vacuum for others to fill.  Plus, it would serve as a fantastic lesson to both.  Time to grow up, time to learn.  

Even if you disagree, what they do during a deflation in an otherwise free market is not universal - and the fact that such disputes place non-firm related INDIVIDUALS at a competitive advantage is a Very Good Thing (to me), but at the very least, one of the losers you would be choosing with any manipulation in either the "Keynesian" or "Chicagoan" scenario. 

Furthermore, this is not even a long term problem that needs to be meddled with.  Even Keynes himself described "sticky wages" as not a problem in the long term. Everything levels out in the long run - this is only an issue - AND ONLY TO THOSE AFFECTED - during periods of deflation. Savers who were otherwise robbed by inflation at least get to see a return of SOME (NOT ALL) of their value during those deflationary periods.  And THAT does not even address the question of why we would even have periods of deflation!  That's another subject altogether, but also something I don't accept as necessarily "normal", as a rule, in a truly free market.

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## limepickle

low preference guy,
we are arguing different things- I'm arguing which currency would win were we to have competing currencies, and I don't understand why Austrians prefer gold. You said we can have private enterprise issue gold currency, but there are government restrictions. Were we to eliminate the restrictions and a private market did issue gold backed currency, it would not be as effective as my system. What you are missing is that the currency can not give people more purchasing power or less. Simply, the currency will have to adjust to the productivity. That's why it makes more sense to have a currency tied to the productivity rather than an arbitrary commodity. You are not reading into my explanation of the barter correctly. The purpose of this was to demonstrate that a currency that's tied to the products rather than to the commodities makes more sense. "If a government doesn't have a monopoly on money, there would be no money." I never said that, so please read my statements correctly.

Steven,
it is important to recognize that Friedman's views on the Federal Reserve changed greatly over the course of his career. But by his public prime, he had established himself as a monetarist who believed in stable increase in money supply and not credit expansion. You say that increasing money supply by matching growth is "currency manipulation." What is this based on? Currency manipulation involves using the currency to achieve another end; this is what the Keynesians do with QE, but this is not at all like what I'm suggesting. Under a gold standard, the currency is tied to gold, and under my standard, it's tied to change in GDP. There is no manipulation going on here. Rather, I find the gold standard manipulative in that you are choosing to set the dollar to the value of one market good. That's price fixing. Unions exist in a free market, and I'm not talking about all the rights and privileges that they now have. Picture a perfect free market- unions would still exist, and they would still engage in collective bargaining. This collective bargaining lends itself toward having the same wages for every worker of the same position. Now in this case, if they don't want to see a wage reduction, it is not because of stubbornness of negotiation, it's simply because they don't know what the value of their currency actually is. It's too unstable; it's always increasing in value but by how much? Just as the current Keynesian system causes us to overvalue our currency, the gold standard would cause us to undervalue our currency. So you see that really yours is the currency manipulation. Then you are talking about the Fed. Why? Where did I mention the Fed? Why do you continue to argue with me as if I'm Keynesian?

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## Steven Douglas

> You say that increasing money supply by matching growth is "currency manipulation." What is this based on? Currency manipulation involves using the currency to achieve another end; this is what the Keynesians do with QE, but this is not at all like what I'm suggesting. Under a gold standard, the currency is tied to gold, and under my standard, it's tied to change in GDP. There is no manipulation going on here.


Any time you "peg" a currency TO ANYTHING except "THE EACH THING" (as opposed to the "EVERYTHING" aggregate the GDP supposedly stands for) - you have manipulated the currency.  

Furthermore, I am not for "a gold standard".  I want that wonderfully terribly unwieldy thing called Freely Competing Freely Floating Currencies, of which gold is only ONE. 

The idea that there would be a problem with tracking values is a complete and utter fallacy, because we do it all the time, independent of currencies - despite the fact that all goods and services are already valued and tracked in all currencies.  You actually can shop on ebay and buy something that is priced in Euros. The conversion when you purchase _is mostly transparent_.  If we had a gold, silver, platinum, paper - or you-name-it-other currency, it would be NOTHING to make purchasing in these various currencies completely transparent.  We actually do have the technology. Right now.  It is not a question of "Visa" only, but you can't use Discover or American Express.  That's ludicrous.  It's more like Euros versus Pesos versus Dollars - all of which can be (and ARE) handled by a single card.  

I, as a store owner, for example, say, "Our stuff is priced in silver" - Visa, MC, Amex, etc., all accepted.  You don't care. You're going to pay with whatever your stuff is stored in, and that has to be converted (automatically) according to the RIGHT NOW value differential of each.   Big deal - that's what we do now.   If I go to Canada or Germany, I can use my Mastercard. I have residency in China and pay for things using a Visa card that pays out in USD. Chinese merchants receive it in RMB.  SO SIMPLE.  That same principle applies to _all competing currencies_, regardless of their backing, the values of which are NEVER the same.  

Let's say you don't like my silver-based prices because you chose a paper currency that is constantly losing value to hard specie? That's your problem. You can choose whatever you want...unless of course some bonehead has taken that choice from you.  Then what can I say, but tough luck - go shoot the bonehead and come back with a currency that holds its value.   





> Rather, I find the gold standard manipulative in that you are choosing to set the dollar to the value of one market good. That's price fixing.


No, let's not conflate terms. Price fixing would be determining how much ONE unit of single given commodity was worth in gold.  Even when Congress originally defined a dollar, it was not a declaration of its value, but only its CONTENT.  Just a unit of measurement. 

But let's say that gold was subject to manipulation - and it is, although NOTHING like on the scale that happens with irredeemable fiat currencies - regardless how they are 'pegged' or otherwise 'valued'.  

At any rate, how about neither a fiat currency or a "gold standard"?  A "basket of GDP" might feel good to you, and you might "trust" it enough to use a standard for determining the value of an otherwise irredeemable paper currency.  I wouldn't trust it as manipulation-free at all, any more than I consider the CPI anything but a waste of a lot of pointy-heads' time.  But I don't want that to stop you from having that _as an option_. As for me, it's still a currency pool, the value of which is going to be siphoned by deficit spending and fractional reserve lending - SO I WANT NO PART OF IT.  Me, personally. 

And if you have a system, any system, that just won't work without mandatory participation by everyone: I already know it's something I don't want any part of, be it healthcare, insurance, or a fiat Ponzi scheme (only this time one that is REALLY carefully managed, we promise, natch). 

To "fix" a currency value is still a single currency - ONE currency versus MANY goods and services, regardless of its "peg".  The more competing currencies there are, the less chance of manipulation; naturally. It doesn't even require ANYBODY to dream up formulae to FIX a "fair" value.  If I smell a rat, I'll jump ship. Because I can.  What would be wrong with that? You trust in your paper currency with a GDP peg, I'll select something else entirely - something with with no invisible tax, regardless how 'judiciously' applied. 




> Unions exist in a free market, and I'm not talking about all the rights and privileges that they now have. Picture a perfect free market- unions would still exist, and they would still engage in collective bargaining. This collective bargaining lends itself toward having the same wages for every worker of the same position.


Same wages for every worker of every position? THAT sounds like a good idea to you?  Sounds positively ludicrous to me, given that NO individual has the exact same value as any other individual.  And I do believe in the reality of individual worth.  But hey, if people want to "pool" themselves together into a common worth, that's their business...so long as they NEVER attempt to force (by any means) other individuals into that pool, or degrade their rights, value, or ability to contract - and even COMPETE AGAINST that group as individuals in any way.  Then they have no sympathy from me, and can kiss my butt. 




> Now in this case, if they don't want to see a wage reduction, it is not because of stubbornness of negotiation, it's simply because they don't know what the value of their currency actually is.


True enough, they wouldn't understand _natural deflation_ any more than they understand _artificial inflation_.  So...we just continue not to educate them plainly, in terms they can understand - keep the public in the dark, treat them as too lazy and/or stupid to care, or even not refined enough to understand all the delicate and complex intricacies and machinations? 

Because that is how they are treated now by all the blithering and obfuscating sides (public and private) that shovel unadulterated, unnecessarily complex and deliberately obfuscating "facts" into their heads - to show them just how much they don't know, and should just leave it to the experts to decide.  How about we tell the truth, the whole truth, the core simplest of truths, and nothing but? 

Well, I won't hold my breath for that to happen. 

Better yet, why not take all the machinations out of it, and make it to where they don't have to trust _any one idea_, let alone currency?  




> It's too unstable; it's always increasing in value but by how much? Just as the current Keynesian system causes us to overvalue our currency, the gold standard would cause us to undervalue our currency. So you see that really yours is the currency manipulation.


I disagree in the near absolute.  The current Keynesian system is NOT the flip-side of a gold standard. Not even close, no comparison whatsoever.  And by gold standard, I mean a non-fiat currency with no fractional reserve lending, no central bank, no deficit spending, and nothing inflationary tolerated.

That is not "currency manipulation", but rather a check (just one - not enough) against currency manipulation.  A gold standard like that would not "cause us to undervalue our currency" - because it WOULD BE the currency.  Of whatever value, as determined by the free market.  But it would not be enough, and is not what I favor anyway. 

You really have this thought out as an either/or proposition, where we really don't know the relative value of anything at all, given a single choice. And somehow multiple choices (like multiple fiat currencies we see now across the globe) is too complicated - too much like bartering.   Once again, I'm not saying "gold standard", and I certainly would not be so presumptuous as to want to dictate a fiat currency to anyone. That would defeat the purpose of competing currencies, after all. 




> Then you are talking about the Fed. Why? Where did I mention the Fed? Why do you continue to argue with me as if I'm Keynesian?


Because you are arguing in favor of a fiat currency. When you see "Fed" think "issuing authority", of which the Fed is our current example.   And Keynesian because you are arguing ideas that are rooted in Keynesian principles. Hell, even the so-called "Keynesians" are not Keynesians! Keynes was in favor of a methodone solution that modern "Keynesians" ran with and took a license to run a heroin trafficking operation.  Lutherans are not Catholics, but that doesn't mean they are not founded from same basic set of scriptural precepts. 

As I understand it, you are in favor of a fiat currency, one that we are all tied into, and that is pegged to (and inflates along with) domestic growth, as determined by the GDP.  In other words, an artificial zero-sum game, which you consider "fair".  You didn't mention that for this system to work, just like the current system, it must continue to expand...indefinitely. It assumes a GDP that is always expanding, and does not account for the possibility of a full-on system-wide collapse (in which case catastrophic deflation could occur).  

You didn't say what you would do about deficit spending or fractional reserve lending, let alone address the fact that both practices literally siphon value from a collectivized currency pool (regardless who controls it).  That's where the fuel for the engine comes from. Unless you have something different in mind? That's a spin on the same old Ponzi scheme.  I would rather opt out of that system, and you can have fun with that party yourself. 

One fact that you cannot get around - regardless what currency you 'think' is the most stable, the most reasonable - it WILL have a floating value against all other commodities, including gold.  They will NEVER be the same. Given a choice between your wonderful fiat currency and almost ANY durable hard commodity - I would choose the commodity - without touching your choice to be part of a collectivized currency that is both defined and based inherently on debt.

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## Diurdi

> And I should add that in a free market, wages don't beat out prices unless the workers produce more value in some way. If wages don't fall as much as prices and the only reason is because of hard money confusion, you should expect layoffs


 What? That makes no sense.

Yes, higher wages contribute to higher prices of products. However, the price of products can fall for reasons other than labour. For example: I get a new efficient machine - the prices of my goods fall but wages remain stagnant. No layoffs needed.

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## Diurdi

> Do you think withholding taxes are a free market idea? Obviously not, so while it might be debatable whether Friedman was a statist, it's not an argument that can be taken as a joke.


 Friedman was not a statist, atleast not in the end of his life.

He was a Keynesian in the 1950's but he turned away from that.

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## Travlyr

The Gold Standard does not need to be set at a fixed price.



> Under a gold standard, the currency is tied to gold, and under my standard, it's tied to change in GDP. There is no manipulation going on here. Rather, I find the gold standard manipulative in that you are choosing to set the dollar to the value of one market good. That's price fixing.


Alexander Hamilton fixed the price of gold with the Coinage Act of 1792.



> EAGLES--each to be of he value of ten dollars or units, and to contain two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold.


He could have set the Gold Standard without fixing the price,



> EAGLES--each to be of he value of ten dollars or units, and to contain two hundred and forty-seven grains and four eighths of a grain of pure, or two hundred and seventy grains of standard gold.


Accurate purity and weight sets the legal standard which all coinage must maintain, or better. Ditto for Platinum, Silver, Copper, etc. In a free-market where no prices were fixed all commodities would "float" against each other based on the supply and demand of the commodity. We really don't need Ivy League smarty pants Ph.D's telling us what to use for money. We just need legal standards on which to base fraud.

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## low preference guy

> low preference guy,
> we are arguing different things- I'm arguing which currency would win were we to have competing currencies, and I don't understand why Austrians prefer gold.


More than "preferring gold", Austrians prefer a free market in money. They just expect that in a free market gold will be the most common form of money, because that's what occurred through history.

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## limepickle

Steven,
I understand that you want competing currencies, and so do I. The question is which currency is better and why- you said that if a chose a paper currency, that's my problem. It's not a problem at all. If you choose the silver currency, you will have a stronger currency, but over time, you will get paid less and less. You have no more purchasing power than I do. In fact, the purchasing power will be exactly the same, 100%. If you gave everyone in the world 10,000 dollars, purchasing power would stay the same for everyone. You are not used to this, because you are used to neo-Keynesians picking winners and losers. 
Of course we can track values- it takes time and adjustment. Why bother when you can have constant stability? What is the disadvantage of having my wage and purchasing power stay the same? For the record, I don't believe in a fractional reserve system nor do I believe in deficit spending. You are so used to the effects of money being used as stimulus that you equate increasing the money supply to stimulus and "manipulation."
It doesn't matter what I think about same wages for every worker. That's how unions work and that's a reality that you have to face. Of course I think people that work harder should get paid more, and they often do. What I'm talking about in regards to unions is that if unions want wages to stay the same and hard money calls for wages to decrease, likely the unions will have everyone keep the same wages and have the company do lay offs rather than taking cuts across the board. That's how unions work. 
No I never said that it would be too much like bartering. I'm getting frustrated because you're not reading my posts correctly. My barter system statement was made to demonstrate how hard money works. My goal is to replicate the barter system but have money as a median. In my opinion, that is the best replica of a free market. The truth is that people would undervalue their currency were it a gold standard, and let's look at how the barter system works to see why. In a barter system,  I might trade a gallon of milk for an ounce of gold. This will not always be the case- later on, because the supply of gold is fixed, I will need to trade 2 gallons of milk for an ounce of gold. Gold is supposed to increase in value relative to other goods. So if you have a currency which is tied to gold, your currency will constantly be increasing in value, and that means that you will be constantly undervaluing your currency and having to adjust prices. It's not a zero sum game to increase money supply with growth. As long as we are talking about zero sum games, you have continued to show mercantilist thought in your argument, as if holding on to hard money will make you wealthier. How? It will not

Diurdi, I've already addressed this. Please read the posts- I'm one against a million here. It's frustrating having to keep repeating the same thing. Of course prices can go down and wages go up. That happens if the supply in the product market increases, as your example demonstrates. Because we are only talking about the money market, I'm assuming no change in the product market.

Travlyr, you don't have to have Ivy Leagues telling you which currency you use to know that a hard money currency will rip you off. It doesn't hurt anyone to divide newly printed money to all that hold that money. With a hard money currency, you will go to the store and see that you can trade 5 platinum dollars for a television. But the truth is that the television should only really cost 4 platinum dollars. Of course, the next day it might say the tv is 4 platinum dollars. You got ripped off because the tool that you are using to purchase is constantly increasing in value relative to what your purchasing. You can have free floating currencies; i'm just wondering why you would choose hard money.

low preference guy, gold was preferred as money at a time when people believed that accumulating gold meant accumulating wealth. Adam Smith showed us that this was wrong. Gold has a market value, but possessing that gold won't make the work that you do any more worthwhile than if you don't have gold. If you get paid in something that doesn't constantly increase in value, then you will simply make more money. So purchasing power stays the same, but for the reasons I've explained above, I prefer paper.

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## low preference guy

> low preference guy, gold was preferred as money at a time when people believed that accumulating gold meant accumulating wealth. Adam Smith showed us that this was wrong. Gold has a market value, but possessing that gold won't make the work that you do any more worthwhile than if you don't have gold. If you get paid in something that doesn't constantly increase in value, then you will simply make more money. So purchasing power stays the same, but for the reasons I've explained above, I prefer paper.


Well, most Austrians disagree with your analysis. They believe that legal restrictions on the use of gold as money such as capital gain taxes and legal tender laws are the reason people don't use gold as money today. You might disagree with this analysis but that doesn't change that most Austrians, at least Hayek, RP, Mises, Salerno, and Block don't favor a government-run gold standard. They want a free market in money and expect that gold will become monetized, and apparently you misunderstood this and believed that they do favor a government-run gold standard.

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## limepickle

Ok but suppose that you have a private gold currency firm. The same principle remains true- the only way that firm will be able to issue new currency is if people sell that firm gold in exchange for newly printed currency. But what do you suppose happens when we run out of gold or at least the rate of gold mined slows down much further than growth in other areas? That firm can no longer issue new currency or enough currency to meet the demand, and consequently everyone that holds that currency will see prices fall. Workers will be resistant to a wage drop naturally. Meanwhile, the paper currency will have grown the same amount- prices will be the same, and businesses can pay workers the same wages and not worry about any resistance. So why would the gold be more popular than the paper done right? Both will have the same purchasing power but the gold is more volatile and confusing

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## Steven Douglas

> I might trade a gallon of milk for an ounce of gold. This will not always be the case- later on, because the supply of gold is fixed, I will need to trade 2 gallons of milk for an ounce of gold. Gold is supposed to increase in value relative to other goods. So if you have a currency which is tied to gold, your currency will constantly be increasing in value, and that means that you will be constantly undervaluing your currency and having to adjust prices. It's not a zero sum game to increase money supply with growth.


And that gets right to the crux of it. 

Any theoretical system that assumes indefinite expansion, with no mechanism that allows for contraction, let alone admits it as equally desirable and beneficial (like simply breathing in and out) is Keynesian rooted, and wholly unsustainable in the long term.  

Keynesian economics (by any other name) places an artificial _contractual_ expectation for an enlarged economy, with dire economic consequences should it not continue to grow, quite apart from ordinary consequences (e.g., an island nation with a stable population).  

Biting Off More Than Everyone Else Can Chew is one of the most tragic unintended consequences, I believe, of inflationary manipulations to the economy, to the point where we automatically assume that 2 gallons today will be replaced by a need for 4, 8 and 16 gallons tomorrow, ad infinitum.  

One of the fallacies of a world that reckons money strictly in terms of debt, is a global economy that fully expects - and requires - infinite expansion - which it must sustain in order to survive.  That is the most insidious side effect of all inverted pyramid Ponzi schemes, regardless how well they are managed.  You MUST produce more, consume more, and take on more debt, or the system WILL collapse, and catastrophically.   It is for that reason that I want to throttle every politician and economist who talks about the need to "Grow The Economy". 

I don't blame technology for our recent exponential population explosion, nearly as much as I lay it _mostly_ at the doorstep of Inflation Economics, which takes massive amounts of productivity out of circulation, even as it sows seeds of growth expectations into fallow fields that CANNOT keep up with all the _progressively increasing_ demand, which assumes that more productivity will be always be added to the system, in an EVER-EXPANDING CIRCLE of ever-expanding debt. 

Not only is infinite expansion a logical/physical impossibility - the greater likelihood in my mind is that a catastrophic collapse will make it to where NO gallon of milk can make it to ANY market for ANY amount of gold.  And our population will be kept in check...naturally...just like currencies and commodities.  Nature and reality have ways of sorting us all out - with no way to outclever it, since reality and nature themselves are not "governed" by any of our theories.  

In short, I believe that our end game - the net effect of _expected expansion_, is mass population control, partly by war, but mostly by starvation. That's our ultimate zero-sum game in a nutshell, which leaves the survivors with a system that really is more self-balancing, one that will not expand too artificially, at least at first, as one unit of a commodity really will be revealed to have a stable exchange value with another unit of a differing commodity. Until, that is, someone, somewhere, gets a clever thought in their head. We haven't evolved past that part yet, so until then, rinse and repeat.

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## limepickle

Steven, I understand what you're saying, but my model still follows natural contraction. My model does not use money as a stimulus to constantly keep growing, so if the number of gallons of milk per ounce of gold went from 1 to 2 to 3 back to 2, my model would not try to fight that. Change in GDP can also be negative, in which case you would shrink the money supply. All it means is that I'm basing the currency off of milk and other goods which we generally trade with (including gold) rather than just with the gold.

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## Steven Douglas

> Steven, I understand what you're saying, but my model still follows natural contraction. My model does not use money as a stimulus to constantly keep growing, so if the number of gallons of milk per ounce of gold went from 1 to 2 to 3 back to 2, my model would not try to fight that. Change in GDP can also be negative, in which case you would shrink the money supply. All it means is that I'm basing the currency off of milk and other goods which we generally trade with rather than the gold.


OK, fine - every system has mechanisms for inflation. Our primary mechanisms are deficit spending and fractional reserve lending, both of which rely on a privately controlled central facilitator with a monopoly on currency issuance via a collectivized/socialized/privatized money pool. How would yours differ? By what mechanisms would the money supply in your model be created and destroyed?  Where is the goes-inta, where is the goes-outa, who controls them and how?

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## limepickle

One of the easiest ways to accomplish this goal is to have a hybrid hard money standard. There is a certain amount of gold in the world and that gold totals to some value. You first establish how many dollars you want to issue for that gold. 30 per ounce, 40 per ounce, 50 per ounce- whatever, the initial setting doesn't matter. Now any time there is a positive change in GDP, you would add that to the initial total value of gold and adjust how many dollars it takes for an ounce (32, 42, 52, depending on the numbers and what you started with). If our GDP change were negative and so negative that the value went below the initial value, the adjustment would make gold less valuable than it was before (28, 38, 48 let's say). And this is how it should be, because the gold supply is fixed. If we produce at a high rate, than the products naturally diminish in value compared to gold- if we produce nothing at all, then the products increase in value in relation to the gold. Gold, being an element, unlike what we produce, can never decrease nor increase in supply.  This is a simple system that can be carried out privately or by government and avoids any sort of decision making institutions like the Fed. All we need is to take the numbers for GDP which we already get and adjust how much currency we print. The gold serves to eliminate the problem of which people do we give the currency to in order to increase the supply, but that's it. We could use any other metal actually. Preferably, we might even use platinum because it is currently closer to having the fixed supply we should expect in the future.

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## Steven Douglas

It doesn't sound too well thought out, to be honest, as no specific mechanisms were described.  How you 'issue' the currency, or get it into circulation isn't clear. At least the privately owned Fed was able to seed itself from a completely stolen money supply that was already in place - and was able to eliminate competition through legal tender laws and by taxing other banks out of existence.  For your system to work, I assume that legal tender laws would have to remain firmly in place, because competing currencies (commodities) would easily outperform a currency like yours.  

It's also not clear how banks factor in.  If fractional reserve lending is permitted, they'll siphon value directly from the money supply, inflating it regardless of its backing.  Deficit spending by government (borrowing value directly from the money supply but owing it back to a third party instead) also went unmentioned - would that be prohibited?  These are the two primary mechanisms by which inflated money is introduced into the economy. And on both sides, it chooses definite winners and losers: the government for its own reasons, as public sector spending that favors its own causes without having to raise taxes, and banking, as it favors those whom it deems credit-worthy, particularly the wealthy and especially large firms. Both of those channels, or spigots, leave the middle and lower classes hanging, as anybody not connected to government or banking interests are decided losers in the long run.   Are you saying cut both off completely, and let the free market work? Government goes back to taxation only as a means of raising revenue, while banks are confined to non-inflationary practices?

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## limepickle

Competing Currencies would not outperform this currency system, because they are inherently more volatile and present no advantages. If I choose my system's currency, I have the same purchasing power as any other good competing currency, but prices stay the same and my wage stays the same; it's a lot more stable. 

How can fractional reserve lending be permitted if there is no central bank or reserve? Fractional reserve banking only exists because the Federal Reserve credits all the money that's lent out. Under my system, the money that the printing agency can issue is strictly limited to the change in GDP. The currency creator can not credit all loans, and therefore fractional reserve banking is impossible. Deficit spending has nothing to do with it. The government could deficit spend in any system regardless of what the currency is- if you want to stop deficit spending, you have to deal with the government directly. However, because there is no Federal Reserve under my system, the excessive borrowing would be more difficult yes. There's no difference between any hard money standard and my system as it relates to limiting the power for inflation and manipulation; it's just more sensible to have the currency run with all the goods rather than just gold.

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## Steven Douglas

> Competing Currencies would not outperform this currency system, because they are inherently more volatile and present no advantages. If I choose my system's currency, I have the same purchasing power as any other good competing currency, but prices stay the same and my wage stays the same; it's a lot more stable.


Then it wouldn't matter if competing currencies existed.  I don't have a problem with that, provided there was a choice, and that theory of yours (that all purchasing power would remain the same) could prove itself out.

BTW, fractional reserve lending has been practiced from antiquity, and requires no central bank.  The Panic of 1907 that was used as the rationale for the Federal Reserve was caused by fractional reserve lending, and the inherent bank insolvency that grew to disastrous proportions with some catastrophic failures as a result.  The central bank is actually only a facilitator for more organized fractional reserve lending on a much grander scale.  The bulk of money creation - the actual inflationary practice, happens as a multiplier from the banks. You don't have to take my work for it, you can read about it in the Chicago Fed's publication "Modern Money Mechanics - A Workbook on Bank Reserves and Deposit Expansion" (pdf file)

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## limepickle

Steven, that's fair enough. Yes you could practice fractional reserve banking, but it would be illegal unless you drew explicit permission from the customers of a bank to lend their money. Of course instead of having insolvency and debt for the banks, now the Federal Reserve effectively steals money from everyone to save the banks from insolvency. That this is wrong we can definitely agree on.

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## nayjevin

Mises:

http://blog.mises.org/19354/mises-in...gless-concepts




> The notions of inflation and deflation are not praxeological  concepts.  They were not created by economists, but by the mundane  speech of the public and of politicians. They implied the popular  fallacy that there is such a thing as neutral money or money of stable  purchasing power and that sound money should be neutral and stable in  purchasing power. From this point of view the term inflation was applied  to signify cash-induced changes resulting in a drop in purchasing  power, and the term deflation to signify cash-induced changes resulting  in a rise in purchasing power.
> 
> However, those applying these terms are not aware of  the fact that  purchasing power never remains unchanged and that  consequently there is  always either inflation or deflation. They ignore  these necessarily perpetual  fluctuations as far as they are only small  and inconspicuous, and reserve the use of the terms to big changes in  purchasing power. Since the question at what point a change in  purchasing power begins to deserve being called big depends on personal  relevance judgments, it becomes manifest that inflation and deflation  are terms lacking the categorial precision required for praxeological,  economic, and catallactic concepts.

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## limepickle

Mises is correct, and this is what I've been saying. There is no change in purchasing power no matter which currency system use unless new money is directed toward a few at the expensive of the many. The difference is that excessive dumps of money supply as well as excessive restriction of money supply both require constant adjustment by the market. Perfectly matching the money supply does not require adjustment.

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## Steven Douglas

> Mises is correct, and this is what I've been saying. There is no change in purchasing power no matter which currency system use unless new money is directed toward a few at the expensive of the many. The difference is that excessive dumps of money supply as well as excessive restriction of money supply both require constant adjustment by the market. Perfectly matching the money supply does not require adjustment.


I think you might have misunderstood Mises, who talked about "...*the popular fallacy* that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power." 

You wrote: "There is no change in purchasing power no matter which currency system use unless new money is directed toward a few at the expensive of the many."

That actually contradicts what Mises wrote: "...the fact that purchasing power never remains unchanged." (in other words, it is always changing under any sound currency), but you are also arguing against what Mises called a fallacy by stating, in essence, that sound money "should be" neutral and stable in purchasing power.(i.e., peg it to GDP to avoid a "constant adjustment by the market").

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## Xenophage

There's monetary inflation even under a gold standard as new gold is mined and minted.  Deflation can be the result of increasing productivity, but it can also be the result of decreasing capital.  As long as capital is not being withdrawn, which is what we experience during market busts, there's nothing bad about deflation.

So there's good deflation and bad deflation.  The deflation that occurs naturally as a result of increased productivity and advancements in technology is nothing to be feared.

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## nayjevin

Purchasing power itself is only meaningful in terms of the item exchanged.  How many gallons of gas does $100 buy?  How many dollars does a gallon of gas cost?  Furthermore, purchasing power can be increased by walking down the street and finding a different exchange partner.  

Value is subjective, each individual chooses the price at which he or she is willing to buy or sell any given item at any given moment.

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## limepickle

Yes sorry I misread that. Then I suppose that Mises was referring to individual goods. But monetary inflation and deflation don't control purchasing power as it relates to individual goods. How can you change the fact that a limited supply of oil will drive prices up? However, on a larger scale, it is true that purchasing power stays the same through monetary inflation and deflation. If everyone is wealthier, everyone is wealthier, but if everyone just has more money, no one has more money. Look what happened during the gold rush- everyone had more gold, and gold became worthless.

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## Travlyr

> Steven, I understand what you're saying, but my model still follows natural contraction. My model does not use money as a stimulus to constantly keep growing, so if the number of gallons of milk per ounce of gold went from 1 to 2 to 3 back to 2, my model would not try to fight that. Change in GDP can also be negative, in which case you would shrink the money supply. All it means is that I'm basing the currency off of milk and other goods which we generally trade with (including gold) rather than just with the gold.


limepickle - Under your system of money, who is in charge of printing it?

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## limepickle

Travlyr, it could be anyone

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## Travlyr

> Travlyr, it could be anyone


I would like to apply.

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