Should the money supply be constant?

[Kerbouchard]

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

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

A great article, thanks.



Mike

 

[foofighter20x]

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.

Did you not understand when I said that the amount of money must be static? If it is, then no deflation ever occurs. Things just get cheaper as more are produced, and produced at less cost.

And a very high rate of divisbility is a desirable feature in a money system.

Comprende?

 

[kyleAF]

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 actually disagree with this. Everything must taken in an appropriate context, and today's educational cost context is something entirely out of hand. The only real reason that education costs so much is because of our government's wonderful policy of insisting that everyone get "credentials" before they practice within a profession.

Credentials cost a lot of money, of course. The educational institutions have since grown to massive sizes, and have used their margins to corner additional markets: of less-than-needed "degrees" (Fine Arts, Finance, Education, Social Work, etc...).

Education should be reserved for those who choose to pursue it within the free market place. NOT for anyone who wants to get a decent job. The latter just forces costs up for everyone, while the value of the education goes down significantly. A bachelor's degree is a dime-a-dozen now. A master's degree is approaching the same.

And good luck if you don't have either... you'd better take on a LOT of debt and get that piece of paper, otherwise you'll be stuck in McDonald's forever...

So you see, the government has forced us to take on such debt in many ways, just to compete for the decreasing American pie. We've been so conditioned, that we consider it advisable to enter into exorbitant debt for, say, a Bachelor's in Social Work.

I consider ALL debt to be less than advisable. Take on the minimum you can possibly take on. Period. Live within your means. Period.

I only wish I had realized this sooner, myself.

 

[anaconda]

Dear Foofighter20X...Things "getting cheaper" is the definition of deflation, in terms of the price level.

 

[AceNZ]

"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.

+1. Well said.

Dear Foofighter20X...Things "getting cheaper" is the definition of deflation, in terms of the price level.

There are two kinds of deflation (and inflation): Monetary deflation (the Austrian definition) is when the money supply contracts. Price deflation (the common definition) is when prices go down. One does not always imply the other. With a constant money supply, for example, you would generally expect mild price deflation (assuming evenly-balanced foreign trade).

Americans have been conditioned to believe that price deflation is evil -- but it's not. The problem with it is that it makes life difficult for banks, with potential negative interest rates for loans, etc. However, for the average person, price deflation is good, in the same sense that price inflation is bad. Imagine gas prices going down every year instead of going up....

 

[foofighter20x]

Dear Foofighter20X...Things "getting cheaper" is the definition of deflation, in terms of the price level.

*BRRRRRNNNNNNNNT*

Wrong.

Inflation - an increase in the total amount of money in the money supply. There are more dollars this year than last year.

Therefore, conversely:

Deflation - a decrease in the total amount of money in the money supply. There are less dollars this year than last year.

A static (i.e. fixed; unchanging) money supply experiences neither inflation nor deflation. There are exactly the same amount of dollars this year as last year.

Products becoming cheaper in a static money supply is a result of market forces, of overproduction and supply and demand, of competition, of advancements in the means of production which reduces the cost of producing, and NOT due to deflation.

In deflation, assuming steady production, since the amount of money in the supply decreases, it becomes worth MORE relative to other goods and services.

For example, if in a static money supply the market produces 1M microwaves per year to meet the demand of 1M microwaves per year, then the price will stay the same from year to year.

Say another company enters the market and produces another .01M microwaves with pretty much all the same features for the same cost. Say they price them the same. Those who couldn't or wouldn't buy a microwave at cost x are not about to try and buy them just because there's .01M more microwaves. That means companies are going to be left with microwaves at the end of the year.

So, guess what happens. To move the extra microwaves, they have to cut the costs of them so more people can afford them, or will be tempted to buy them.

If the producers wish to maintain the same profit margin, then they either have to cut costs, improve their product, or scale back production (which means that the net product becomes cheaper either way).

See? Deflation is not the cause; overproduction is. Deflation is not the result either, but competition for a better product which results in cheaper goods or services. It's all supply and demand.

When stating your opinion, it helps to know the meaning of the terms.

Finally, a question: if we are supposed to inflate the money supply per year by the cost of every good and service produced or provided, then who gets the money first?

Does it go to newborns? Or is it equitably distributed throughout the entire country? Or is it given to people in amounts proportional to their share of the national wealth? Really, tell me. I'd like to know what you decide, and to back up why what you decide is fair to everyone (equal protection and such...).

You need to read about the real effects of any inflation.