An argument AGAINST returning to the gold standard

[Brian4Liberty]

Also a gold standard:

1. causes deflation because population growth is higher than increases in the gold supply

2. Fixes exchange rates between two countries, which is anti-free market. If U.S. sets dollar to $10 per x amount of gold, and U.K. sets the pound to 5 pounds per x amount of gold, then the fixed exchange rate is $2 per british pound - which creates a host of problems.

Well, most of the discussion has revolved around the merits of deflation. so item #1 isn't an issue for everyone.

As for item #2, I can only speak for myself, but exchange rates should be set by the market, and the gold or silver coinage should be in terms of metal, not any other value. A one once gold coin is a one ounce gold coin. That's what it is. It's value is not set or fixed to anything other than it's metal content (purity and weight).

 

[dannno]

What you're describing is not a 'steady paycheck,' it is a growing paycheck. In the situation you describe, real wages are increasing.

In order to have a steady wage in a deflationary economy, your nominal wage would have to decrease.

I meant steady paycheck in nominal terms.

 

[Seraphim]

This!

Correct. Federal Reserve money creation secures leverage/speculation. It is not wealth creation. We have twin super bubbles now. They are financial services and government. They reinforce each other. They also lead to a bubble economy, and redistribution of wealth to the powerful. That's why financial services are now 22% of the US economy. In 1965 financial services were 6% of the economy,. Government spending (federal, state and local) averaged 25% of the nations spending in the 50's. . Now almost double at 45%.

There is no recovery as long until the twin bubbles of financial services and government continue. They are the greatest mal investments in history.

 

[Brian4Liberty]

Inflation incentivises investment,..

So it should be the explicit goal and central plan of our money system to manipulate and favor certain market sectors?

 

[Brian4Liberty]

The #1 reason why (almost) all economists say deflation is worse than inflation is because spending now is discouraged when your dollar will be worth more tomorrow. Steady inflation is preferred because it encourages people to spend today which can facilitate more trade and higher growth.

Certainly there are pros and cons, but a slow, steady deflation would not radically change spending habits. Studies have shown that people tend to either like immediate gratification, or they are patient and can wait. Slow, steady deflation would not alter that basic personality trait. I know plenty of "immediate gratification" people, and nothing slows them down when it comes to spending or indulging.

As far as increasing value over time delaying a purchase, how long can you hold out to buy your next PC or smart phone? The longer you wait, the better the product you will get. Does that stop everyone from buying?

When it comes to investing, yes, an investment must have a better rate (or promise of a potentially better rate) of return than holding cash. That's the way the markets always work.

 

[The Gold Standard]

It's a problem for labor. Labor going up against a fixed sum of gold, drives down its price. There's always a crew with a fast "deflation is good" arguement, but this doesn't seem to register. Food stocks might grow faster than labor, thus keeping food affordable, but we've seen what happened to corn in the last few years. Point is, there is no guarantee that incomes will fall any slower than the price of necessities.

There are no guarantees for anything, but throughout history wages did fall slower than prices when we had somewhat sound money. Read up on the industrial revolution.

As far as bankers, think of this. If you had all the wealth many of these guys made from selling off misrepresented risk, what would you do in deflation? How about sitting on your hands because you know your purchasing power (all that gold) simply goes up as newcomers struggle to get a piece.

If gold wasn't circulating then it wouldn't be a medium of exchange. Something else would be. Of course if the bankers could make more money lending out the gold than sitting on it, they would do that. That is what they did back when gold was used as money. They didn't sit on the gold thinking they were doing well on 2% price deflation. Your knowledge of history seems to be lacking, which seems to be a common theme with proponents of today's disaster of a monetary policy.

There's a reason more banksters like the gold standard than ordinary educated men.

Who do you think was behind the creation of the Federal Reserve? Ordinary educated men?

 

[ForLiberty2012]

Certainly there are pros and cons, but a slow, steady deflation would not radically change spending habits. Studies have shown that people tend to either like immediate gratification, or they are patient and can wait. Slow, steady deflation would not alter that basic personality trait. I know plenty of "immediate gratification" people, and nothing slows them down when it comes to spending or indulging.

Policies affect spending habits... Problem is when you have central planners trying to "outsmart" the economy. But you can't because policies affect people differently. One person's reaction to deflation may cause them to save, because their money will be worth more in the future, while someone else may decide to spend, because prices of goods are cheaper than they were the day before.

I think inflation is much more dangerous because you devalue the dollar and increase the price of goods... but wages never keep up with that rate because not all money trickles down. Inflation helps the elite and the "perceived" value of the stock market.

 

[The Gold Standard]

Inflation incentivises investment, because there is a constant errosion of idle wealth. Deflation does the opposite.

It certainly does incentivize investment. Only a fool would sit on money that was losing value very day. So they invested in tech stocks and real estate and mortgag backed securities. Oops. When a central planner tries to incentivize investment all you get is malinvestment in projects that can not be completely because the necessary resources do not exist to finish all of them. Boom becomes bust. Deflation is never dramatic enough to have an effect on incentives unless it is a severe deflation following an inflationary boom. The free market incentivizes investment when people have refrained from consumption and saved the money and resources necessary to complete those investments.

Why clear the banana fields to make "everyone wealthier", if it keeps me relatively even with them? I want to be a rich capitalist, wealthier than the others. If I have enough bananas, why participate in deflating their value? Why not propose a merger with the guava guy, until the monopolization of necessity enables us to pick-off the gold from the other three?

To maximize the money you make on the bananas? Do you get more money selling 50 bananas for $1 each or 200 bananas at $0.50 each. I guess you skipped economics class too along with history class.

And why are you bringing up monopolies. The money supply wouldn't determine if they were going to do that. And assuming this island isn't a fascist set up like the U.S., people would save their own guava seeds and plant them and compete with the big guava corporation. Do you think the fruit monopoly would take all $10 on the island and then sit on it? For what? Everyone else would transact in seashells or something and not buy fruit from the monopoly anymore. And that is assuming people would give every last penny to the monopoly without using some other source for food, which wouldn't happen.

 

[Kregisen]

Certainly there are pros and cons, but a slow, steady deflation would not radically change spending habits. Studies have shown that people tend to either like immediate gratification, or they are patient and can wait. Slow, steady deflation would not alter that basic personality trait. I know plenty of "immediate gratification" people, and nothing slows them down when it comes to spending or indulging.

As far as increasing value over time delaying a purchase, how long can you hold out to buy your next PC or smart phone? The longer you wait, the better the product you will get. Does that stop everyone from buying?

When it comes to investing, yes, an investment must have a better rate (or promise of a potentially better rate) of return than holding cash. That's the way the markets always work.

You're missing the point. At every percentage level, inflation is less harmful to the economy than deflation. 1% inflation is better than 1% deflation, etc. Yes a "slow, steady deflation" that you point out, like .1%, obviously would have virtually no effect, just like .1% inflation would have no effect. Your first point is missing this information.

Your second point is irrelevant. Yes, technological advances (Moore's law) is a variable that helps determine when people spend their money. Inflation/deflation is a SECOND variable that also plays into it. So yes, people are more likely to wait to buy a TV a year later since prices will be lower due to technological advances, but they will also wait longer due to deflation. The variables add on top of eachother, they don't cancel eachother out like you seem to be implying?

 

[onlyrp]

if somebody thinks deflation is a bad thing, I can't help him.

 

[The Gold Standard]

You're missing the point. At every percentage level, inflation is less harmful to the economy than deflation. 1% inflation is better than 1% deflation, etc. Yes a "slow, steady deflation" that you point out, like .1%, obviously would have virtually no effect, just like .1% inflation would have no effect. Your first point is missing this information.

Your second point is irrelevant. Yes, technological advances (Moore's law) is a variable that helps determine when people spend their money. Inflation/deflation is a SECOND variable that also plays into it. So yes, people are more likely to wait to buy a TV a year later since prices will be lower due to technological advances, but they will also wait longer due to deflation. The variables add on top of eachother, they don't cancel eachother out like you seem to be implying?

If you want to know how your theory works, look at the only sector where prices have been falling for years. How many people put off buying the new iPhone when it first came out only to wait until the price drops? Oh, none. Ok. what about the PS3? I can see the terrible suffering the tech industry has gone through over the last 30 years as prices have fallen.

 

[ForLiberty2012]

If you want to know how your theory works, look at the only sector where prices have been falling for years. How many people put off buying the new iPhone when it first came out only to wait until the price drops? Oh, none. Ok. what about the PS3? I can see the terrible suffering the tech industry has gone through over the last 30 years as prices have fallen.

^Winning. Plus you can't generalize for an entire economy. If you could then our Keynesian saviors would have already put the perfect system in place. Which is why the Austrian school is more valid. You cannot centrally plan the entire economy.

 

[Kregisen]

Did you guys even read my post you quoted? Do you guys know what Moore's law is? Logic is lacking on page 6....

People wait to buy new TVs because prices always fall. Less than 10 years ago, a 50" plasma 1080P would have costed $5,000...today, it would be $600.

Even myself decided not to buy a new TV last year because I know they will be cheaper this year and I can afford to wait.

Comparing deflation to a brand new iphone coming out is uhhh...silly. lol. That is completely different than buying the SAME product a year later.


You can fight over whether or not you believe deflation is better than inflation, but denying that deflation encourages people to save is denying the 2 x 2. It's the law of economics.

 

[The Gold Standard]

Did you guys even read my post you quoted? Do you guys know what Moore's law is? Logic is lacking on page 6....

People wait to buy new TVs because prices always fall. Less than 10 years ago, a 50" plasma 1080P would have costed $5,000...today, it would be $600.

Even myself decided not to buy a new TV last year because I know they will be cheaper this year and I can afford to wait.

Comparing deflation to a brand new iphone coming out is uhhh...silly. lol. That is completely different than buying the SAME product a year later.

It is exactly the same. People can buy the same iPhone as the one that just came out a year later for much less money but they don't. They buy it now. Because they demand it, and the price deflation in tech is much higher than general price deflation in a sound money economy. No one is going to put off buying something they demand because the price might be 2% cheaper in a year. Your nonsensical theory about why deflation is bad is completely wrong.

 

[Kregisen]

It is exactly the same. People can buy the same iPhone as the one that just came out a year later for much less money but they don't. They buy it now. Because they demand it, and the price deflation in tech is much higher than general price deflation in a sound money economy. No one is going to put off buying something they demand because the price might be 2% cheaper in a year. Your nonsensical theory about why deflation is bad is completely wrong.

Go take an economics course. This isn't even arguing macro-econ theory, this is simply micro-econ fact. You're simply ignoring logic right now. Saying "no one is going to put off buying something they demand because the price might be 2% cheaper in a year" is just like Saying nobody is going to win Iowa out of 120,000 votes because a family of 9 voted. (it was won by 8 votes, atleast initially)

When you have 150 million shoppers in America, even if only 1% of those were on the edge of buying a product or not (very conservative estimate), that is 1,500,000 more products not sold due to the increased deflation, for every single buying decision in America. How many buying choices do you make a day? 10? How many is that per year? 3,650? Times 150 million shoppers?

And that is only counting 1 year with deflation of just 2%. In reality it would be closer to 3% per year, every year under a gold standard (except the random years when new hoards of gold are found and huge inflation kicks in)


It isn't random that every economist will tell you deflation can be much more deadly than inflation. (not that either is good)

 

[Kregisen]

On top of that, if a bubble bursts and a recession hits, a gold standard wouldn't be able to expand the money supply to counter-act deflation from the increased propensity to save during a recession. This is where hyperdeflation kicks in, and even worse than hyperinflation, can destroy an economy.

 

[ForLiberty2012]

Go take an economics course. This isn't even arguing macro-econ theory, this is simply micro-econ fact. You're simply ignoring logic right now. Saying "no one is going to put off buying something they demand because the price might be 2% cheaper in a year" is just like Saying nobody is going to win Iowa out of 120,000 votes because a family of 9 voted. (it was won by 8 votes, atleast initially)

When you have 150 million shoppers in America, even if only 1% of those were on the edge of buying a product or not (very conservative estimate), that is 1,500,000 more products not sold due to the increased deflation, for every single buying decision in America. How many buying choices do you make a day? 10? How many is that per year? 3,650? Times 150 million shoppers?

And that is only counting 1 year with deflation of just 2%. In reality it would be closer to 3% per year, every year under a gold standard (except the random years when new hoards of gold are found and huge inflation kicks in)


It isn't random that every economist will tell you deflation can be much more deadly than inflation. (not that either is good)

I've taken a class or two on economics. In fact I'm an economics major. Keynesians believe deflation is bad because it's bad for the stock market and it's not good when you have a lot of debt to pay off. So right now, yes it would not be good for the US economy. But in a perfect free market deflation is not necessarily bad because of the mentioned arguments.

 

[The Gold Standard]

Go take an economics course. This isn't even arguing macro-econ theory, this is simply micro-econ fact. You're simply ignoring logic right now. Saying "no one is going to put off buying something they demand because the price might be 2% cheaper in a year" is just like Saying nobody is going to win Iowa out of 120,000 votes because a family of 9 voted. (it was won by 8 votes, atleast initially)

When you have 150 million shoppers in America, even if only 1% of those were on the edge of buying a product or not (very conservative estimate), that is 1,500,000 more products not sold due to the increased deflation, for every single buying decision in America. How many buying choices do you make a day? 10? How many is that per year? 3,650? Times 150 million shoppers?

And that is only counting 1 year with deflation of just 2%. In reality it would be closer to 3% per year, every year under a gold standard (except the random years when new hoards of gold are found and huge inflation kicks in)


It isn't random that every economist will tell you deflation can be much more deadly than inflation. (not that either is good)

Where are you getting 1% from? Out of your ass? Did demand wither away and die during the industrial revolution? Did the economy screech to a halt? Oh, it exploded.

Even if people put off buying a TV, why is that a disaster? It's not like they are going to light that money on fire instead. If they don't buy a TV they will buy something else or put it in the bank and lower interest rates for businesses to borrow that money. In a free market whatever they choose to do would be the right decision because the price system would communicate that information to everyone involved.

"Every economist" will not tell you deflation is deadly. Every state sponsored one will, but not every single one.

 

[Kregisen]

I've taken a class or two on economics. In fact I'm an economics major. Keynesians believe deflation is bad because it's bad for the stock market and it's not good when you have a lot of debt to pay off. So right now, yes it would not be good for the US economy. But in a perfect free market deflation is not necessarily bad because of the mentioned arguments.

Keynesians believe deflation is bad for a host of reasons, but there are universal reasons why deflation is bad for an economy, like the main one I stated. You can go ask any of your professors about the propensity to consume and save in different levels of the economy i.e. when a recession hits.

Again, I'm not advocating inflation either because it is a tax and effects different people at different stages, but to argue that deflation is any better is a little far-fetched.

 

[The Gold Standard]

On top of that, if a bubble bursts and a recession hits, a gold standard wouldn't be able to expand the money supply to counter-act deflation from the increased propensity to save during a recession. This is where hyperdeflation kicks in, and even worse than hyperinflation, can destroy an economy.

Destroy an economy? Has "hyperdeflation" ever destroyed an economy? How did we ever get out of depressions before the Fed? You do realize the country wasn't founded in 1913, right?