Should the money supply be constant?

[AFM]

School me on economics.
I realize that the increase in the supply of money leads to its devaluation, but does it follow then that the supply of money should be constant?
If the economy grows and there are more goods and services out there, wouldn't that lead to deflation, because the money supply in relation to goods would shrink?

Whats the consensus here?

 

[forsmant]

Since the money supply would remain constant there would be no deflation. Prices will inevitably go down and the value of money would go up. Money would become scarce and people would simply start using something else.

Deflation is defined as a decrease in the money supply.

I think that is is the rapidity of inflation that causes the problems. What are people to do when the money supply is nearly doubled in 10 years and not evenly distributed?

 

[Acala]

Constant is good

If the money supply was constant, prices would slowly go down due to increases in productivity and eventually to increases in demand for money as the economy grew in size. But it isn't a problem to have the money slowly increase in value. Prices adjust. You only run into problems when prices - particularly wages - are stuck in place and can't go down. This can be due to government intervention such as minimum wage laws or due to labor unions. If wages don't go down as the value of money goes up, it will cause unemployment.

 

[polomertz]

Savings rates go through the roof! Whoopeee!

 

[Dr.3D]

Savings rates go through the roof! Whoopeee!

That is something our country seriously needs.

 

[NaT805]

School me on economics.
I realize that the increase in the supply of money leads to its devaluation, but does it follow then that the supply of money should be constant?
If the economy grows and there are more goods and services out there, wouldn't that lead to deflation, because the money supply in relation to goods would shrink?

Whats the consensus here?

The supply of money must increase for the economy to be sustainable. The gold supply increases in supply of average 3% a year, which is the perfect amount of inflation because it can't be manipulated. And also if there is no demand for more money they wont mine gold...but if we need more money, they will mine more gold... all the meanwhile prices remain constant or go down as we produce more effecient ways to produce them. So on a gold standard the money supply would either be constant, or increasing in small restricted amounts. Gold is also consumed being used in computers.

 

[AFM]

The supply of money must increase for the economy to be sustainable. The gold supply increases in supply of average 3% a year, which is the perfect amount of inflation because it can't be manipulated. And also if there is no demand for more money they wont mine gold...but if we need more money, they will mine more gold... all the meanwhile prices remain constant or go down as we produce more effecient ways to produce them. So on a gold standard the money supply would either be constant, or increasing in small restricted amounts. Gold is also consumed being used in computers.

Thank you. That was what I wanted to know.

 

[forsmant]

The supply of money must increase for the economy to be sustainable. The gold supply increases in supply of average 3% a year, which is the perfect amount of inflation because it can't be manipulated. And also if there is no demand for more money they wont mine gold...but if we need more money, they will mine more gold... all the meanwhile prices remain constant or go down as we produce more effecient ways to produce them. So on a gold standard the money supply would either be constant, or increasing in small restricted amounts. Gold is also consumed being used in computers.

Gold miners will mine gold regardless of how much money we demand. The profit margin will lower and until that margin inverts miners will mine. That means that a constant money supply of gold is impossible.

 

[foofighter20x]

The supply of money must increase for the economy to be sustainable.

No it doesn't.

Assuming a static money supply, prices will fall over time due to advances in technology and more efficient means of production.

The only thing you have to worry about is population growth and how rapid it is, as that can put real strain on a money supply.

Even then, the way of fixing that problem is NOT inflation, but by making smaller denominations of the currency readily available for use. As prices continue to fall, so will cost of living; and as cost of living falls, so will the wages of new hires; and as wages falls, so do prices. It's a nice little circle.

 

[Dr.3D]

No it doesn't.

Assuming a static money supply, prices will fall over time due to advances in technology and more efficient means of production.

The only thing you have to worry about is population growth and how rapid it is, as that can put real strain on a money supply.

Even then, the way of fixing that problem is NOT inflation, but by making smaller denominations of the currency readily available for use. As prices continue to fall, so will cost of living; and as cost of living falls, so will the wages of new hires; and as wages falls, so do prices. It's a nice little circle.

Yes, imagine working less and not being a slave to technology but rather, let it do what it is intended to do. As intended, it would make life easier because it would take less money to make things and thus less money would be needed to buy things.

How I wish it had been like that all these years I was alive.

 

[Pauls' Revere]

That is something our country seriously needs.

As consumers go we should pay off as much personal debt as possible before investing. Any and all disposable income (that which is used on luxuries and other non-essentials) should and would be better used to pay off debt. If you have a credit card charging 13% or an investment which earns say 10% your money "works" harder used to pay off the higher interest rather than put into the 10% investment. Not to mention the time it takes to pay things off, your saving yourself time in a way too. Remember, time is money; since you must spend time to earn money the logic follows. All other things being equal of course such as risk assestment etc...Then and only then should people start to save or invest. There is a thing as "good" debt for such things as loans for an education but loans in the form of credit cards to purchase a blender is a terrible use of money. Items such as those should be paid in full and in cash. Remember cash?

 

[Dr.3D]

As consumers go we should pay off as much personal debt as possible before investing. Any and all disposable income (that which is used on luxuries and other non-essentials) should and would be better used to pay off debt. If you have a credit card charging 13% or an investment which earns say 10% your money "works" harder used to pay off the higher interest rather than put into the 10% investment. Not to mention the time it takes to pay things off, your saving yourself time in a way too. Remember, time is money; since you must spend time to earn money the logic follows. All other things being equal of course such as risk assestment etc...Then and only then should people start to save or invest. There is a thing as "good" debt for such things as loans for an education but loans in the form of credit cards to purchase a blender is a terrible use of money. Items such as those should be paid in full and in cash. Remember cash?

I don't have any debt at all. I do use credit cards though... I just pay them off every month and that way I don't have to pay interest. Anymore, I have to pay at the ATM to get cash and this way it is easier, plus at the end of the year, I can get a record of what I spent money on from the credit card company. I'm not worried people will track my spending habits because I am not doing anything they would find objectionable. There are times I do spend cash, but those times are few and far between. Mostly a debt card is what I buy groceries and such with. It's the same difference as writing a check.

 

[OptionsTrader]

http://mises.org:88/FEA9

 

[theseus51]

No Shortage of Gold, by Austrian economist Hans F. Sennholz

http://www.fee.org/publications/the-freeman/article.asp?aid=6378

 

[misa]

School me on economics.
I realize that the increase in the supply of money leads to its devaluation, but does it follow then that the supply of money should be constant?
If the economy grows and there are more goods and services out there, wouldn't that lead to deflation, because the money supply in relation to goods would shrink?

Whats the consensus here?

Correct me if i'm wrong. My understanding is devaluation only happens when we print money out of thin air, ie. no real products or services being created for that new money. If on the other hand, 3 loaves of bread are being created and the money supply increases to match that 3 loaves of bread, then there should be no increase in price, and no inflation per se, and no diminishing of purchasing power (which is what we all worry about anyway, in the end).

I think we might even be looking at this backwards, and I mean, money supply should never be a problem or even something to be controlled. What we should put our attention is to the actual producing of wealth that can be exchanged for money. When we produce, then automatically the money supply will rise to match that production. Creating money supply first and hope for the products later is rather faulty. Of course this is a total free market scenario, not our current system.

IMO. What am I missing here..?

 

[Truth Warrior]

For whatever it may be worth, Milton Friedman suggested that the Fed should be replaced with a computer that automatically increases the money supply by 2% every year.

Under the "Rule of 72" the money supply would double about every 36 years.

 

[NaT805]

No it doesn't.

Assuming a static money supply, prices will fall over time due to advances in technology and more efficient means of production.

The only thing you have to worry about is population growth and how rapid it is, as that can put real strain on a money supply.

Even then, the way of fixing that problem is NOT inflation, but by making smaller denominations of the currency readily available for use. As prices continue to fall, so will cost of living; and as cost of living falls, so will the wages of new hires; and as wages falls, so do prices. It's a nice little circle.

Everything you said is exactly true but deflation is just as bad as inflation. That is exactly why there needs to be an increase in the money supply. Otherwise something will cost 00.00000000000000000000000000000000001 cents. The inflation gold offers is so little it has the effect of price stability. The gold standard is like the equal balance of inflation and deflation, with it, and the free market, it always seems to work out.

 

[NaT805]

That means that a constant money supply of gold is impossible.

I think the fact it's shiny and pretty makes it impossible, haha.

 

[anaconda]

This is something I have not fully understood about Ron Paul. I believe I heard him tell Bernanke that "people were being robbed of their savings" by the Fed printing money. The money supply presumably would need to keep up with population growth or else we would have very inefficient means for facilitating transactions and would decay into a barter type system. Also, excess demand for money increases interest rates and reduces investment spending. People don't invest their savings in cash, for God's sake. They invest in interest earning assets or assets that appreciate with inflation. So if anyone can help me with RP's attacks on Bernanke I'm all ears.

 

[Acala]

My two cents (adjusted for inflation)

"Everything you said is exactly true but deflation is just as bad as inflation. That is exactly why there needs to be an increase in the money supply. Otherwise something will cost 00.00000000000000000000000000000000001 cents."

Please cite an economic study that says that deflation is as bad as inflation. Inflation causes malinvestment in the market, destroys the incentive for saving and capital formation, impoverishes people on fixed incomes, and destroys the middle class. Inflation is also inevitably used as a political tool that ultimately destroys the currency. Deflation does not do any of these things.

It is true that if you have a constant money supply and the slow but steady growth from honest capital formation, the value of your money will go up. But this actually rewards the kind of conduct that makes the free market productive - savings and investment in the means of production.

I am only aware of two problems with a constant money supply - as prices slide downward, any prices that are held artificially high by law or by labor union activity cause unemployment. The solution there is to prevent government from enacting or assisting wage or price controls.

The other problem, which you mention, is that the unit of money (presumably gold) becomes unmanageably small. This is really not a problem either, because most of that money is going to circulate as warehouse receipts. As long as those warehouse receipts are full reserve, they will be good money. And it will be a thousand years before we have to deal with micrograms or some such. And before that, as another poster pointed out, the market would smoothly adopt a new currency.