Monetary standards

[A18]

It's an interesting idea, but I'm aware of no evidence supporting it.

I would pursue a zero-inflation target with fiat money.

[bullmoose88]

It's an interesting idea, but I'm aware of no evidence supporting it.

I would pursue a zero-inflation target with fiat money.

zero inflation?

did I read that right?

[A18]

Yes. For every bit of inflation, there would need to be deflation to cancel it out.

[Emsworth]

I would pursue a zero-inflation target with fiat money.

In order to pursue such a target, the central bank would have to be able to gauge the economy appropriately. I would argue that the government is incapable of determining the most appropriate general price level, just as it is incapable of determining the most appropriate price of any particular product. A zero-inflation target strikes me as a form of general price control.

[bullmoose88]

I've always viewed inflation, in low form, as the grease in the wheels of the economy.  Allows the real wages of labor to fall while giving nominal wage increases etc (since wages are downward rigid)...

[A18]

I would pursue a zero-inflation target with fiat money.

In order to pursue such a target, the central bank would have to be able to gauge the economy appropriately. I would argue that the government is incapable of determining the most appropriate general price level, just as it is incapable of determining the most appropriate price of any particular product. A zero-inflation target strikes me as a form of general price control.

No, it is a money supply control. What is being controlled is the price of the dollar, in order to keep constant its purchasing power. The prices of goods and services remain open to market competition.

[A18]

I've always viewed inflation, in low form, as the grease in the wheels of the economy.  Allows the real wages of labor to fall while giving nominal wage increases etc (since wages are downward rigid)...

I don't get it. How is that supposed to help the economy?

We don't really have low inflation now anyway. Unless you consider an annual 3-4% increase in the price level to be 'low.' What target would you set?

[Emsworth]

The prices of goods and services remain open to market competition.

They remain open to market competition only as long as the "average" price of these goods and services remains at some arbitrary constant level. I would argue that it is optimal to allow the price of the dollar to float freely, in accordance with the dictates of market forces.

Mild deflation that naturally results from the free market is certainly not bad for the economy.

[A18]

They remain open to market competition only as long as the "average" price of these goods and services remains at some arbitrary constant level.

No, you're thinking of prices relative to the dollar. Their actual prices remain constant. It is the price of the dollar that falls, thus maintaining the purchasing power of the currency.

Everyone is forced to use the dollar. By engaging in inflationary or deflationary policy, the government essentially taxes lenders or borrowers.

[Emsworth]

By engaging in inflationary or deflationary policy, the government essentially taxes lenders or borrowers.

By tampering with the money supply, the government causes businesses to either overinvest or underinvest, as I argued above. I think that it is much better to allow the market to take its own natural course, rather than attempting to correct its tendencies in any way. (I understand that this conclusion is not necessarily shared by the non-Austrians.)

The argument against the gold standard, i.e., the argument against deflation, seems to be that deflation "robs" borrowers. This problem can very easily be avoided if the lender and borrower agree to index their loan to changes in the price of the dollar.

[A18]

Seems to me that the gold standard gives foreigners purchasing power in our economy in exchange for nothing, and that gold has actual, non-monetary uses.

I suppose under the Austrian theory, if enough gold was discovered, we would also have these distortions in the economy. What if it one day becomes possible to mass produce gold?

[Emsworth]

I suppose under the Austrian theory, if enough gold was discovered, we would also have these distortions in the economy.

No monetary system is perfect. The potential for distortions would certainly exist, even if fiat money is replaced by the gold standard.

The question to be asked is, what monetary standard would the free market naturally tend toward? Presumably, businesses would prefer to avoid economic distortions. At the same time, businesses would prefer for the medium of exchange to be convenient, durable, and portable. Rationally weighing the potential for distortion against convenience, the free market will tend toward a monetary system based on a certain commodity. That commodity--it might vary from society to society--should then be adopted as the medium of exchange.

Historically, precious metals--especially gold--have been the preferred medium of exchange wherever available, indicating that the free market naturally tends to prefer them. The government should not attempt to second-guess the natural tendency of the market by speculating about the possible risk for distortion in the future. The free market has already weighed that risk before settling upon precious metals as the preferred medium of exchange.

If it became possible to mass-produce gold, then I suppose that one would have to switch to a different standard.

[A18]

I don't agree that an increase or decrease in the money supply necessarily creates distortions. I do know that inflation and deflation more often than not, do.

[Emsworth]

I don't agree that an increase or decrease in the money supply necessarily creates distortions.

I suppose that we will have to agree to disagree on that point, then.

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When spurred by government activity, yes. When spurred by natural free market forces, no.

[A18]

I'm completely open to repealing taxes on gold and silver, and letting people purchase things in precious metals, provided you can figure out some way to tax it.

I think most people, however, would prefer to make exchanges in a zero-inflation currency, which I think the government is, right now, in the best position to provide.

[David S]

It's an interesting idea, but I'm aware of no evidence supporting it.

I would pursue a zero-inflation target with fiat money.

 When we were on a gold or silver standard inflation did not occur over long periods of time. It only occurred briefly, mainly during wartime  and after the war prices would come back down. Since we abandoned the gold standard zero-inflation is one thing we have not achieved. Inflation has been chronic.

In 1966, before he joined the enemy, Alan Greenspan wrote an article in defense of gold. http://www.321gold.com/fed/greenspan/1966.html  The last two paragraphs kind of sum it up:

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

[A18]

What is your point? We had inflation or deflation based on the discovery of gold.

Why do you support giving other countries purchasing power in our economy in exchange for nothing? It is completely within the scope of the Federal Reserve's power to maintain 'price stability.'

[12th Doctor]

Fiat, since there is not longer enough precious metal to back the amount of money needed to keep the economy going.

There is, you just have to value the dollar low enough. I think one ounce of gold should have to equivalent to about $4000 in order to take in acount all Federal Reserve Liabilities.

Yeah, but in order to make a silver or gold piece the right size compared to value and still keep enough coinage in circulation to meet the needs of the econmy,the dollar would have to be the size of a dime or nickle at most.  Given the way that people loose pocket change, I doubt that going back to that standard would be too practical.

Correction, in order to make a silve peice hat would work, it would have to be that small.  A gold $50 piece would be, again, only about the sze of a dime, if that.  I don't even think that.

[Bono]

What is your point? We had inflation or deflation based on the discovery of gold.

Why do you support giving other countries purchasing power in our economy in exchange for nothing? It is completely within the scope of the Federal Reserve's power to maintain 'price stability.'

What's so wrong with that? What would "other countires" want to buy to begin with, and still what tbney bought would benefit the US economy.

[Bono]

Fiat, since there is not longer enough precious metal to back the amount of money needed to keep the economy going.

There is, you just have to value the dollar low enough. I think one ounce of gold should have to equivalent to about $4000 in order to take in acount all Federal Reserve Liabilities.

Yeah, but in order to make a silver or gold piece the right size compared to value and still keep enough coinage in circulation to meet the needs of the econmy,the dollar would have to be the size of a dime or nickle at most.  Given the way that people loose pocket change, I doubt that going back to that standard would be too practical.

Correction, in order to make a silve peice hat would work, it would have to be that small.  A gold $50 piece would be, again, only about the sze of a dime, if that.  I don't even think that.

Or it coudl just be redeemable.

[A18]

What is your point? We had inflation or deflation based on the discovery of gold.

Why do you support giving other countries purchasing power in our economy in exchange for nothing? It is completely within the scope of the Federal Reserve's power to maintain 'price stability.'

What's so wrong with that? What would "other countires" want to buy to begin with, and still what tbney bought would benefit the US economy.

No, it would just have an inflationary effect.

[Bono]

What is your point? We had inflation or deflation based on the discovery of gold.

Why do you support giving other countries purchasing power in our economy in exchange for nothing? It is completely within the scope of the Federal Reserve's power to maintain 'price stability.'

What's so wrong with that? What would "other countires" want to buy to begin with, and still what tbney bought would benefit the US economy.

No, it would just have an inflationary effect.

Temporary, plus you still haven't told me waht "other countries" could possibly want to buy. Not to mention the market will take that into account.

[David S]

Following is a quote by Thomas Jefferson.

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around [the banks], will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
http://www.usiap.org/Legacy/Quotes/ThomasJefferson.html

Isn't that exactly what happened. Less than 20 years after the Fed was born the country had been through all of that and was in the worst depression in its history, and the people, at least many of them, were "homeless on the continent their fathers conquered."

[Gabu]

Isn't that exactly what happened. Less than 20 years after the Fed was born the country had been through all of that and was in the worst depression in its history, and the people, at least many of them, were "homeless on the continent their fathers conquered."

But since then, with the Fed still in existence, America recovered from the depression and has been through numerous periods of relatively solid economic growth... how does that fit into the picture?

[David S]

Isn't that exactly what happened. Less than 20 years after the Fed was born the country had been through all of that and was in the worst depression in its history, and the people, at least many of them, were "homeless on the continent their fathers conquered."

But since then, with the Fed still in existence, America recovered from the depression and has been through numerous periods of relatively solid economic growth... how does that fit into the picture?

The dollar has lost 95% of its value since the fed came into existence, we had several recessions, and the S&L failures  cost the taxpayers about $.5 trillion. Because the Fed makes it easy for the federal government to spend more than it takes in, the national debt is now over $8 trillion. Aside from all of that the Fed is fine.