Down with Paper-Buggism!

by Don Boudreaux on November 12, 2011

in Monetary Policy, Myths and Fallacies

Here’s George Selgin in prime form: responding to the NY Times’s Eduardo Porter on gold, paper, and thinking seriously about money.  And here’s an especially entertaining slice:

But why harp on inflation? After all, fiat money at least has the virtue of hardly ever being in short supply, so that economies need not fear being unable to grow for want of it. In contrast under a gold standard, Mr. Porter assures us, “the economy couldn’t grow faster than the supply of gold.” Evidently Mr. Porter here overlooks another relevant episode in economic history. This episode is known as “the 19th century.”

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{ 71 comments }

Publius November 12, 2011 at 9:02 am

William Jennings Bryan lives!

Bagelwoof November 12, 2011 at 9:46 am

Why do we want the infinite growth economy that we’re locked into with the usurious currency we have? This demotes us to being nothing more than bacteria infesting a host.

We should instead choose to evolve.

vidyohs November 12, 2011 at 11:08 am

Is evolution more likely to cause growth or shrinkage?

I think growth.

Have you ever heard the wisdom that if “you ain’t growing, you is dying”? Have you contemplated that if that be true, and it is certainly reflected in life, then infinite growth of a people depends on infinite growth in all the things that people do in order to continue growing and avoid dying?

Paul Brinkley November 12, 2011 at 12:47 pm

Very curious to hear someone say a growing economy is a *bad* thing…

Greg Webb November 12, 2011 at 10:10 am

Excellent comments by George Selgin. I particularly like this part:

But there’s one thing that’s guaranteed to bring out the gold bug in me, and that is ill-informed arguments against the gold standard. No, make that stupid arguments, because the ones I have in mind aren’t merely ill-informed. They are ill-informed in a way that suggests that the persons who make them don’t even think about what they’re saying.

Mr. Selgin does a great job revealing Eduardo Porter’s disingenuous and outright stupid arguments against the gold standard. In the paragraph noted above, he gives the reason so many commenters at Cafe Hayek do not simply ignore the similarly disingenuous and outright stupid arguments of big-government advocates posting on this blog.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 1:30 pm

Brad DeLong torpedoes this ship

Another Note on Von Mises’s (and Ron Paul’s) Monetary Mental Disorder

http://delong.typepad.com/sdj/2011/11/another-note-on-von-misess-and-ron-pauls-monetary-mental-disorder.html

“Money” discussion:

From my point of view, liquidity creation, duration transformation, and simple diversification are all attempts to make the law of large numbers work for us. They are largely successful attempts not to buy liquidity, immediacy, and Insurance from those who want to sell them, but rather to create them out of whole cloth–via clever applications of the principles of probability. As such, they are the preeminent examples of our largely successful ability to make the economy live beyond its means on its wits. Liquidity, immediacy, and insurance are good and valuable things: the marvel of financial engineering is that it creates them out of thin air.

But to von Mises (and Ron Paul), they are all terrifying.

The point of view underlying von Mises’s–and von Hayek, and Marx, and Ron Paul–complaint against fiat money in general and monetary management of the business cycle in particular is this: that value comes from human sweat and toil, not from being clever. Thus it is fine for money to have value if it is 100% backed by gold dug from the earth by sweat and machines and muscles (even if there is no state of the possible future world in which people actually want to exchange their pieces of paper for the gold that supposedly backs it). But it is not fine for money to have value simply because it is useful for buying things. There is, von Mises–and Marx, and von Hayek, and Ron Paul–think, something profoundly wrong on an economic and on a moral level with procedures that create value that is not backed by, in Marx’s case, human labor, and in von Mises’s and von Hayek’s case human entrepreneurial ingenuity. And in its scarier moments this train of thought slides over to: “good German engineers (and workers); bad Jewish financiers”.

Note that this does not just apply to fiat money produced by a government.

This applies to all financial market asset valuations in excess of capital cost of production (or perhaps the value of the inventions of the gigantic Krell-like brain of John Galt). They are, to von Mises, all cheats. Thus Von Mises loathes fractional reserve bankers and IPO-mongers as much as he loathes modern central bank chairs.

The “value equals cost of production constant returns to scale” viewpoint is an astonishingly powerful set of blinders to wear.

Greg Webb November 13, 2011 at 1:36 pm

STRAW MAN ARGUMENT ALERT!

“that value comes from human sweat and toil, not from being clever”

LOL! That is Marx, not Mises.

Rick Hull November 13, 2011 at 1:45 pm

> Note that this does not just apply to fiat money produced by a government.

> This applies to all financial market asset valuations in excess of capital cost of production

I find this hard to believe, having read Mises. The subjective theory of value tells us that market valuation is king, not capital cost. In contrast, fiat money in contrast involves coercion and price-fixing, at the very least.

Doc Merlin November 13, 2011 at 6:46 pm

“that value comes from human sweat and toil, not from being clever. ”

This is beyond a straw man. Von Mises and Ron Paul said something quite different. At this point this strays from a straw man and becomes a lie.

Greg webb November 13, 2011 at 7:10 pm

Good point, Doc. I revise my previous alert to:

PREVARICATION ALERT!

I am confident that everyone knows Little Nikki lies though because ALL statists lie.

vidyohs November 12, 2011 at 11:14 am

Does it not seem reasonable that two trading parties trade with each other the things that they value at the time of the trade?

If one party believes the value of a dollar equals some factor of a tangible good, or he believes the dollar has value because the USA promised it would be valuable in trade, isn’t that the decision of the two at the time of the trade?

When in Africa I bought cigarettes for ten cents a pack in our ship’s store, and I traded those packs of cigarettes for artifacts hand crafted by African artists. They were happy and I was happy. Were my cigarettes back by anything other than someone’s anticipated pleasure in the smoking of those cigarettes?

We trade what we think has value, what regulation needs attach to that?

Sam Grove November 12, 2011 at 11:26 am

“the economy couldn’t grow faster than the supply of gold.”

That’s just thoughtless.

The market can alter the value of gold at anytime.

A gold “Standard” isn’t needed.
Gold can be referenced by weight and that’s standard enough.

The thing about gold is that the monetary authority can’t crank it out of its magical printing presses.

Bastiat Smith November 12, 2011 at 12:13 pm

The price of gold can and did change.

My thought exactly! You can’t claim ceteris paribus, if it didn’t actually happen!

Sam Grove November 12, 2011 at 12:48 pm

Price deflation is how the economy can grow more than the supply of gold.

Ken November 12, 2011 at 2:12 pm

But that’s horrible to the eleventy zillion. Everyone says so.

Martin Brock November 12, 2011 at 5:54 pm

Price deflation is not necessary for an economy adhering to a gold standard to grow faster than the supply of gold, because the demand for gold can fall relative to the demand for bank notes redeemable in gold.

Under a gold standard, very few notes promising gold are exchanged for gold. They’re exchanged for other things, like loaves of bread. People demanding more bread does not imply people demanding more gold.

When people want more bread and not more gold, people with more notes promising gold do not increase the demand for gold. They increase the demand for bread. The volume of notes promising gold increases more than the volume of gold.

When you redeem a bank note promising gold for gold, you’re just buying gold from the bank with your money. People buying more bread and other things need not also buy more gold.

Gil November 12, 2011 at 11:15 pm

Hence what’s the problem with goldbugs – they can simply buying gold with their spare change?

Martin Brock November 13, 2011 at 8:53 am

I’m not a gold bug myself. If others want gold as their standard of value, I have no problem with it, but I don’t want a gold standard, and I certainly don’t a gold standard imposed by statute. I want free banking with competing standards and competing currencies.

In a free market, you may deal in notes promising gold, and I may deal in notes promising silver. A free creditor may accept notes promising any standard he chooses, and only the market determines the rates of exchange between notes.

Competing currencies are more practical than ever because of the ease of pricing in multiple currencies in electronic markets. If this system worked at all in the nineteenth century (and it did), it can only be far more workable now.

Sam Grove November 13, 2011 at 2:39 am

Agreed.

vikingvista November 13, 2011 at 12:04 pm

“Price deflation is not necessary for an economy adhering to a gold standard to grow faster than the supply of gold, because the demand for gold can fall relative to the demand for bank notes redeemable in gold.”

There may be some transient flexibility, but deflation *is* the long term result. PT = MV. If T increases against a fixed M, only an at least proportionately increasing V (money reuse rate) can prevent deflation. So unless you are referring to fractional reserve banking, where gold reserves drop and gold notes increase relative to gold stores, (and M refers to the notes, not the gold stores) deflation would be expected. And fractional reserves, in a free market, cannot be arbitrarily low, but are also themselves regulated by a free market. A continuously growing T would eventually strain the market limits of reserve requirements and V, and deflation is the expected result, without an increase in the gold stores forming the base money.

“When you redeem a bank note promising gold for gold, you’re just buying gold from the bank with your money.”

You are also removing notes from circulation (actually from existence), and lowering the base money of the note issuer, which is not the case when you use the notes to buy bread.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 12:29 pm

Martin

In reply to your comment below, your comment is completely disingenuous, for we let creditors do exactly what you propose now. Take the simple example of a creditor who thinks that prices are going to rise before the loan is repaid. They can protect themselves by buying an option. Under “free currency.” as proposed by you. This is what the debtor would have to do, if they entered into a contract payable in gold.

We have gone to legal tender laws and gov’t currency because this is so inefficient and expensive.

All the current system does is change the default. Only people who think they need protection have to buy options, today. Under your system everyone would have to for all creditors would impose every onerous term they could. Look at today’s credit card agreements.

Second, legal tender laws are necessary to make all the laws for adjustment of rights between numerous creditors, etc., work efficiently and fairly.

Josh S November 12, 2011 at 9:05 pm

If prices went down, we’d all die. Notice how the computer industry has collapsed due to the Fed’s inability to destroy the currency fast enough to make the price of PCs rise in nominal terms.

vikingvista November 13, 2011 at 12:32 pm

So true. When (amount of stuff)/(amount of money) gets bigger, an alarm sounds at the Federal Reserve to start increasing (amount of money), because everyone knows, growing the (amount of stuff) is very dangerous to an economy.

/sarcasm

Doc Merlin November 13, 2011 at 6:49 pm

+1

Nikolai Luzhin, Eastern Promises November 12, 2011 at 7:45 pm

no Sam, if you tie the dollar to a “gold standard,” the growth in the money supply is tied to the supply of gold

Sams says, “The thing about gold is that the monetary authority can’t crank it out of its magical printing presses.”

The why not “bull sh!t,” instead of gold. The supply is much more abundant around here.

Jon Murphy November 12, 2011 at 7:56 pm

Question for you, Nikolai:

Gold tends to rise in price as the economy contracts (gold being a safe investment), thus increasing the money supply, something you want to do in times of a contraction. Conversely, the prices of gold tends to drop as the economy improves, thus reducing the money supply.

All of this would be done without the additional costs needed to increase/decrease the money supply as it is presently done. That frees up money to be used in other ways (social nets, infrastructure spending, anything you want).

Is that not preferable to the current system?

Martin Brock November 13, 2011 at 9:33 am

Under a gold standard, a rising price of gold does not increase the money supply. It decreases the money supply. When the price of gold is rising relative to other prices, people hold gold. People holding gold are not exchanging gold for other things. Gold is money when people want to exchange it for other things, not when they want to hold it because its price is rising.

When you’re holding gold, you must exchange something else for what you want. In a free market, people who want to hold gold use a different currency. If people may use gold and only gold as money, the market is not free, and in this scenario, when people wish to hold gold, exchange must contract. Contracting exchange is a contracting economy practically by definition. Exchange is most valuable because most value emerges from specialization and trade.

When gold is the only standard of value (because it is a statutory legal tender imposed by force), a rising price of gold relative to other prices is deflation by definition. The nominal price of gold itself is fixed in this scenario, so the price of gold may rise relative to other goods only when other nominal prices fall. People sell other goods to obtain gold, so other prices fall, and the relative price of gold rises.

In the restricted banking scenario, with gold as an exclusive, statutory legal tender, deflation occurs when people sell other things to obtain gold because banks call loans to satisfy note holders demanding gold.

In a free banking scenario, this increase in the demand for gold relative to other goods affects only banks extending credit by issuing promissory notes (bills of credit) for gold. People desiring gold have nothing to gain from other banks.

Sam Grove November 13, 2011 at 2:30 am

no Sam, if you tie the dollar to a “gold standard,” the growth in the money supply is tied to the supply of gold

That’s why I said: “A gold “Standard” isn’t needed.”

Pay attention.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:12 am

No same,

you need to pay attention. Implicit in my statement was the question, What rule or law of economics makes gold a better currency than bullshit, which improves with age, is abundant, and, as shown by this blog and most of its followers, can be produced by anyone? Or why not tree leafs. The point is that any “thing” can be used as money.

This makes one focus on the real issue. Do we one to use some “thing” as money or do we want to be grown ups, accept that markets are created by the state, and that we are far better off with legal tender laws and the government coining and printing out money, making sure it is not counterfeit, etc. We got where we are the good old fashioned way, trial and error. People tried other ways and learned, from facts and circumstances, that we could improve markets with gov’t money.

Are you smarter than Ben Franklin? He figured this out more than 225 years ago?

Sam Grove November 14, 2011 at 10:12 pm

The point is that any “thing” can be used as money.

As I said below: “Things that can be a store of value can be used as money, damn near anything can be used as money, including paper.”

accept that markets are created by the state

With this claim, you have no credibility.

Are you smarter than Ben Franklin?

Maybe, but that’s not the point. Even smart people can be in error.

Paul Brinkley November 12, 2011 at 12:45 pm

This is amusing. Usually, when I hear the 19th century brought up as an example, it is of corporations running roughshod over workers, thus exemplifying the nightmare that would ensue if libertarians had their way.

Selgin’s argument suggests, rather, that the regulatory side failed to have its act together as well; in short, nobody knew what was going on in those days as well as we know today. Economic thought has progressed over the last hundred years! Not so surprising when I look at it that way.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:14 am

Paul,

If libertarians had their way we would rush right back to December 31, 1860.

The writer of this blog worships The Cause and its principal 20th Century promoter, Mencken

Greg Webb November 13, 2011 at 11:31 am

Nikki, that’s simply stupid and defamatory.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 12:34 pm

Greg Webb

It really is pretty simple.

Don worships Mencken, a racist, who worshiped The Cause

But here is a simple test, for you?

Was it Constitutional for Lincoln to free the slaves?

Do you support the 13th, 14th, and 15th Amendments?

Do you support laws that make discrimination in public accommodation on the basis of race illegal?

Looking forward to your answers

Greg Webb November 13, 2011 at 1:32 pm

Little Nikki, you mean like you worship Karl Marx, an anti-Semite and racist, who worshiped not bathing makes you a smelly racist and Jew hater. There is no rational basis for making such links. Though, in your case, I suspect it’s true.

It was unconstitutional for anyone to keep slaves, thus President Lincoln could issue the Emancipation Proclamation. It is important to note that Dr. Martin Luther King referred to the founding principles as noted on the Declaration of Independence in argunig for equality and freedom.

The 13th, 14th, and 15th Amendments should not have been necessary. I agree with the intent of those amendments, which, once enacted took years to fully implement.

There should not be any discrimination against citizens in public places. New laws are not necessary. Proper enforcement of existing laws is.

Care to come to a point? Or, are you going to call me a silly name as you did Don?

vikingvista November 12, 2011 at 3:25 pm

Before there was buffoonery about fractional reserve banking, there was buffoonery about gold standards. And the latter is particularly idiotic and mainstream.

Doctor Selgin, help! Our monetary theories have fallen, and they can’t get up!

vidyohs November 12, 2011 at 3:38 pm

For some reason I like that last line. :-)

steve November 12, 2011 at 5:04 pm

Interesting that he invokes the 19th century. That same time period demonstrates that defaults, recessions and banking crises can all occur on the gold standard. As Reinhardt and Rogoff demonstrated, a gold standard provides better price stability, but not much else.

Steve

persiflage November 12, 2011 at 6:11 pm

In the search for the holy grail of monetary systems
…a gold standard provides better price stability, but not much else.

No monetary system is going to eliminate all human economic foibles, malinvestments, mistakes, political pressure, occasional criminal misbehavior, greed, etc. Certainly, the current regime of monetary manipulation and libraries full of governmant regulations do not.

Doom! It looks like I’ll just have to muddle along, economically, and take precautions against the liklihood of those mistakes (and occasional criminal acts) that Homo economicus makes.

vikingvista November 12, 2011 at 6:28 pm

Extensive government banking and money regulations confound interpretations of both periods. But is there any economic measure, excluding mere incremental progress, by which the inflationary period of US history compares favorably to the preinflationary period?

Gil November 12, 2011 at 11:16 pm

Hence there will never be a “no true gold-standard economy”.

Craig November 12, 2011 at 6:42 pm

“That same time period demonstrates that defaults, recessions and banking crises can all occur on the gold standard.”

Everything you mention was caused by deviations from the gold standard — usually, banks lending more than their gold reserves. But, even at that, the defaults, recessions and banking crises were of short duration and didn’t plunge the entire nation into anything close to what we have now.

We can’t just legislate away greed and dishonesty; but we can miminize them.

George Selgin November 12, 2011 at 10:32 pm

Steve, I said that the 19th century experience contradicts Porter’s assertion that under a gold standard growth is limited by gold output. I didn’t say that there weren’t crises then, did I?

But since you bring it up, those crises weren’t equally distributed across all banking systems. For instance, while the US and England had many, Canada and Scotland had relatively few. All had metallic standards in common. So attributing 19th century crises to ‘the gold standard simply doesn’t cut it. Indeed, it is but another stupid argument against gold.

Stone Glasgow November 13, 2011 at 6:01 am

*like*

Economic Harmonies November 12, 2011 at 10:52 pm

That same time period demonstrates that defaults, recessions and banking crises can all occur on the gold standard.

Business cycles in the 19th century were caused by fractional reserve banking practices, not the use of gold, per se.

In any case, the various so-called “panics” in the 19th century all self-corrected themselves very quickly, thanks to the absence of legal tender laws and the non-existence of a central bank.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:47 am

Business cycles in the 19th century were caused by fractional reserve banking practices and quickly self corrected?

Where? fantasy land?

Are your forgetting that a real argument exits that we were in a Depression from 1873 to 1896: for 23 years

1815–21 depression 1815–1821 ~6 years ~3 years Shortly after the war ended on March 23, 1815, the United States entered a period of financial panic as bank notes rapidly depreciated because of inflation following the war. The 1815 panic was followed by several years of mild depression, and then a major financial crisis – the Panic of 1819, which featured widespread foreclosures, bank failures, unemployment, a collapse in real estate prices, and a slump in agriculture and manufacturing.[9]

Panic of 1873 and the Long Depression Oct 1873 –
Mar 1879 5 years
5 months 2 years
10 months −33.6% (−27.3%) [nb 3] — Economic problems in Europe prompted the failure of Jay Cooke & Company, the largest bank in the United States, which burst the post-Civil War speculative bubble. The Coinage Act of 1873 also contributed by immediately depressing the price of silver, which hurt North American mining interests.[18] The deflation and wage cuts of the era led to labor turmoil, such as the Great Railroad Strike of 1877. In 1879, the United States returned to the gold standard with the Specie Payment Resumption Act. This is the longest period of economic contraction recognized by the NBER. The Long Depression is sometimes held to be the entire period from 1873–96.[

George Selgin November 13, 2011 at 5:27 pm

Nikolai’s depression dates have long been discredited: no one believe in that “23 year old” depression any longer–see on it Saul’s “The Myth of the Great Depression.” (A very good UVA dissertation by Roger Shields, never published, specifically examines the U.S. case.) Even the “long depression” of ’73-’79 is no longer: that one is based on the NBER’s doubtful pre-1920s chronology, which has been superseded by others, notably Christina Romer’s, for some time now. According to these the post-’73 contraction lasted no more than three years and perhaps closer to two. For sources see my paper with White and Lastrapes, “Has the Fed Been a Failure?”

nailheadtom November 13, 2011 at 9:55 pm

It seems to be SOP for economists to blame any sort of widespread financial troubles on money, banking, interest rates, etc. In 1873 a huge proportion of the horses in the US were stricken with equine influenza, creating a transportation catastrophe. All deliveries were curtailed, fires couldn’t be fought, homes ran out of heating fuel. It took years for the country to entirely recover from this event, which was completely unrelated to any financial failings, although they might have been a contributing factor.

vikingvista November 12, 2011 at 5:50 pm

Prof Selgin,

Ron Paul is an ObGyn, not a pediatrician.

George Selgin November 13, 2011 at 8:17 am

Thanks for the correction, V-V. I’ve amended my post accordingly.

a_murricun November 12, 2011 at 6:43 pm

Is it not true that wealth, properly defined, is tangible consumable goods accumulated in excess of current consumption? Is it not also true that currency is merely a useful token for transferring goods between parties?

If so, is it true that the relative scarcity of gold, but not paper currency, will cause commodity prices to fall?

I seldom read the “economic” commentary in the popular media. Too many “yeah, right” moments.

Nikolai Luzhin, Eastern Promises November 12, 2011 at 7:54 pm

a_murricun

a facet of “money” is that it can be a store of value.

If we used standard loaves of wheat bread of money, they would have a limited life.

People who argue for a gold standard want money to be an indefinite store of value, so that they can hoard (and be rewarded) for hoarding cash when deflation occurs. It is an easy way to “short,” the American economy, without paying commissions.

Of the many many arguments against gold being used as money, the best would be (if this was as true as gold bugs hoped) this very aspect.

We do not want people hoarding cash–we want people to be forced to invest, which increases growth.This is why the Fed targets 1.1% inflation, at a min. Doing such discourages hoarding.

Jon Murphy November 12, 2011 at 8:00 pm

If we don’t want people to hoard money, wouldn’t it make more sense to have market prices that reflect the true inflation rate (or the true cost of production, if you want) as opposed to some governmental directed inflation, one that can be directed for political purposes?

Josh S November 12, 2011 at 9:09 pm

No, actually, “we” don’t want to force people to do anything. “You” want to force people to do what you think is good for them. Most of the commenters here do not see our fellow human beings as puppets, lab rats, toys, or slaves. You, muirgeo, and a few others are the exception.

Jon Murphy November 12, 2011 at 9:12 pm

People are not chessmen you move on a board, their dreams and desires ignored

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:33 am

yes Jon, we are all in this together

Russell Nelson November 13, 2011 at 2:12 am

Oh, Nikolai, you would do much better to read more than you write. If you did that, you would learn something, and express your ignorance less. For example, there is no “we” to not want people hoarding cash. There is no such thing as “hoarding” anything. It’s just a stupid concept for statists who want to denigrate ordinary economic activity so they can interfere in the operations of the market.

Yeah, I’m callin’ you a statist. You wanna step outside??

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:29 am

Russell Nelson

It is not my problem that your Maker did not endow you with the tolerance for ambiguity that is required to understand and work with the paradox of thrift which was so well explained by Keynes.

You want a gold standard so that people can, in effect, hoard cash and short our Economy, hoping to cause deflation.

I favor government having legal tender laws and coining and printing money (I even believe we should replace deposit insurance with direct deposits at no interest with the Fed in “sweep accounts,” you bank account being linked to you Fed account) so as to be able to prevent hoarding.

Thousands of years of history and experience have proved by trial and error that I am right.

I asked someone above this question. Are you smarter than Ben Franklin? or Alexander Hamilton? I will add, do you consider each of them to be a statist? They both figured this out 225 years ago.

Greg Webb November 13, 2011 at 11:41 am

Nikki, you said, “Thousands of years of history and experience have proved by trial and error that I am right.”

Conclusory statement. Where is your evidence? It should be really easy if their are thousands of years of history.

You said, “Are you smarter than Ben Franklin? or Alexander Hamilton? I will add, do you consider each of them to be a statist? They both figured this out 225 years ago.”

Neither Benjamin Franklin nor Alexander Hamilton said that the federal government should have the power to spend in excess of its needs to carry out its limited powers nor to force citizens to spend against their wishes. You are fabricating history again.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 12:40 pm

Russell

The troll, Greg Webb, has some inane foolishness below. I support gov’t issued currency and legal tender laws. So did Franklin and Hamilton

This makes the question, simple, Were Franklin and Hamilton “statists”? Or do you think you are smarter than these two great Americans?

Greg Webb November 13, 2011 at 1:12 pm

Wrongway Nikki, my comment is above yours. That is the problem with you leftist trolls. You can’t get anything right, including history and economics. Hamilton and Franklin never supported fiat money without gold or silver backing them up.

Nikolai Luzhin, Eastern Promises November 13, 2011 at 4:50 pm

Franklin even printed paper money, not backed by gold or silver

Greg Webb November 13, 2011 at 8:55 pm

That’s the job of a printer — to print things requested by his customers, not to tell them that they should not do it.

vikingvista November 14, 2011 at 3:40 am

“the paradox of thrift which was so well explained by Keynes”

Or the Jabberwocky which was so well explained by Carroll.

Russell Nelson November 15, 2011 at 1:47 am

I write clearly, and you respond with gibberish. Typical of an economic crank.

Sam Grove November 13, 2011 at 2:38 am

a facet of “money” is that it can be a store of value.

Things that can be a store of value can be used as money, damn near anything can be used as money, including paper. However, the value of money is not as a store of value, but as a means of trans-economy accounting.

so that they can hoard (and be rewarded) for hoarding cash when deflation occurs

Why is there a problem with that? Do you know?

Nikolai Luzhin, Eastern Promises November 13, 2011 at 11:33 am

Sam Grove thinks deflation is a good thing

Why is there a problem with that? Do you know?

Read Keynes, a few thousand writers on finance throughout history on the direct link between economic growth and being able to borrow money at low interest rates and check back

Hint: Deflation = higher real interest rates, leading to lower borrowing, less investment, less consumption, and lower economic growth

Rick Hull November 13, 2011 at 6:17 pm

The growth you are promoting is cancerous.

vikingvista November 13, 2011 at 11:53 pm

When deflation is the result of a good thing, like productivity growth, then of course it is a good thing. That kind of deflation occurs BECAUSE there is investment, so you are wrong before you even start. And as Prof. Selgin says, an entire century proves you wrong.

As to why your theory contradicts the facts, perhaps you should ponder the theory a little further…

Whether the purchasing power of the loanable funds is confidently expected to grow or shrink, it is the ROI that is priced into the interest rates. Whether they are your funds that you are holding, or you are holding borrowed funds, the inflation or deflation rate on it is the same. Lender and borrower are affected equally by inflation or deflation. That is, the in/deflation that will occur to those funds, will occur no matter who holds them.

As a lender, you estimate what your nominal funds will be worth if you hold onto them. Then you look for an investment that will make that future amount higher. You are looking to decrease your inflation losses, or add to your deflation gains, from the profits generated by your investment. You want real gains, but if you can’t achieve them, you’re not going to turn away merely nominal gains.

You *think* inflation is an increased incentive for the investor to find a return, to keep his head above inflation, and therefore to invest more.

But in reality, central bank monetary inflation merely directs the type of investment required to beat inflation–typically investment in the large financial institutions near the central bank and contractors receiving government spending, which are at the front of inflationary spending. That’s because the originator of inflation–the central bank–and all the institutions nearest to it, are unaffected or least affected by inflation. In other words, monetary inflation MISDIRECTS investment to favor political desires over consumer desires.

Furthermore, lack of predictability of purchasing power and ROI increases risk and therefore raises the cost of and discourages investment, regardless of purchasing power changes. Steady economic growth, with predictable deflation, is more favorable to investment than the asset bubble/recession cycles generated by loose monetary policy.

Finally, losing money is undesirable for anyone. If you can’t see real earnings in an economy because inflation exceeds most nominal ROIs, you are more likely not to participate at all. Sure, you *may* work hard to ensure that you get poorer slower than you otherwise would, if there is no better choice. But often, there will be choices that will make you richer–like those achieved through political connections and transfer payments from taxpayers.

Central bank directed inflation, from theoretical standpoint, is pathological in every respect, including its effects on investment.

Sam Grove November 14, 2011 at 11:09 pm

I didn’t ask that question for my edification, but to find out what you know about it, and your answer is typically superficial.

Deflation may be good or bad depending on why there is deflation.

Interest rates should vary according to circumstances and not be fixed according to some monetary policy.

If an entrepreneur is able to persuade a lender that he has a sure thing, then he may get a low rate, if he can’t persuade anyone that he has a good thing going, then he may have to risk taking a higher interest rate loan.

Fixing low rates to promote economic growth is a recipe for bubbles and more bad investments.

vikingvista November 14, 2011 at 11:23 pm

And how many parrot the fallacy that deflation discourages investment?

I guess the thinking as either that (1) investors aren’t interested in earning more than what deflation provides, or (2) investing is the act of flailing about in panic trying to keep one’s head above inflation.

Either way, it misses the fact that inflation/deflation is what happens to the money, no to the particular person holding the money. Not to mention the fact that investing is the art of the choice, not the mere blind dumping of funds into projects.

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