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Source link: http://archive.mises.org/11036/the-anticipation-of-changes-in-purchasing-power/

The Anticipation of Changes in Purchasing Power

November 16, 2009 by

Nothing can enter into the function of a medium of exchange which was not already previously an economic good to which people assigned exchange value already before it was demanded as such a medium. FULL ARTICLE by Ludwig von Mises


Gil November 16, 2009 at 9:28 am

“Nothing can enter into the function of a medium of exchange which was not already previously an economic good to which people assigned exchange value already before it was demanded as such a medium.”

In other words, free market money started off as ‘loan collateral’. If Bill the apple farmer and Ted the orange farmer really trusted one another then Bill could give Ted a handwritten note for a case of oranges now in lieu of a case of apples later however people found others not so trusting and would tear up the note and pretend it didn’t exist leaving the produce lender out of pocket. The obvious answer would have been some sort of valuable collateral – gold must have been considered prized as jewellery before it was money for it to be valuble enough to be held as collateral. Bill would instead give Ted some gold pieces knowing that if he didn’t come up with a case of apples within a certain amount of time he would forfeit his gold pieces. Bill, on the other hand, now felt safe lending out a case of oranges because he has the same amounts of assets regardless of how honest Ted and others are or aren’t.

Strange how many here don’t bring up the historical example of when Kubla Khan forced people within his domain to give their gold and silver money for his ‘money’ which was bark with some fancy patterns on it. Shortly thereafter there was runaway inflation, surprise, surprise.

Oderus Urungus November 16, 2009 at 9:43 am

I guess Gil is not familiar with the concept of the double coincidence of wants, and what its absence implies.

Gil November 16, 2009 at 9:52 am

No, no I’m not.

fundamentalist November 16, 2009 at 10:27 am

Mises refutes Sumner 60 years in advance!

Shay November 16, 2009 at 11:04 am

Coincidence of wants refers to the situation where at the same time two people each want what the other has, and can thus make a direct trade. In the absence of money, this situation wouldn’t be as common.

fundamentalist November 16, 2009 at 3:49 pm

This article ties in with the rise in the stock market over the past year in spite of the bad economy.

On CNBC this morning (Mon., Nov 16, 2009) I listened to two guests, one from Merrill Lynch, (also Richard Bernstein, of Bernstein Capital Management) talk about the stock market.

(Video at http://www.cnbc.com/id/15838368 “Will Bernanke buoy the buck?)

They said the markets rise over the past year is consistent with current monetary policy. With businesses reluctant to borrow, the “liquidity” created by the Fed tends to go into stocks regardless of the state of the real economy. They said the stock market will continue to soar until the Feds reverse policy and begin to tighten. One expected that to happen late next year, the other expected it in 2011. Those guests probably never heard of Austrian economics or Mises, but they arrived at similar conclusions about the stock market. I had come to that conclusion after reading Machlup’s account of monetary policy and the stock market from the 1930′s.

This view of the stock market is consistent with subjective valuation. Too many Austrians cling to the idea that the stock market has an intrinsic value based on the performance of the economy. It doesn’t. Valuation in the stock market is just as subjective as anything else. Anyone who has read Ben Graham’s analysis of modern stock valuation methods understands how subjective it is.

And this view agrees with the non-strict quantity theory of money as espoused by Mises and Hayek. All things equal, an increase in the quantity of money will cause prices to rise, but not all prices equally and at the same time. The prices that rise first are those prices in the sector of the economy that receives the new money first. In a depression, that new money goes into financial services and the stock market first.

But a change in policy won’t immediately drive stock prices into the ground. Remember that the Feds began raising rates in 2004, but the stock market didn’t peak until Oct 2007. There is a long, but varying lag between when the Feds change policy and when that policy begins to effect stock prices.

montypelerin November 16, 2009 at 9:56 pm

The “barbarous relic,” as Keynes called gold, seems to be popular again and gaining by the day. After years of Central Bank selling, we see a reversal of this trend. India bought a large amount within the last couple of weeks. China is increasing their holdings. Now Mauritius is doing the same.

Mauritius is a small island nation located off the coast of Africa. It is acknowledged to be the home of the dodo bird. As described by the Canadian Museum of Nature: “First seen by Europeans in 1598, the Dodo was extinct shortly after 1640. Mauritius, an island in the Indian Ocean, was its only home. Human activity is to blame for its extinction.” Today, the term “dodo” is often used to refer to someone stupid.

Because gold is “useless,” and all countries are in need of capital to support their economies, it would seem “stupid” to tie up usable funds in an inert metal. While that might be a way to rationalize Mauritius’s recent purchase, it cannot explain away the behavior of China, India and the other Central Banks that are adding to their gold stock. The dodo never lived in any of these countries.

Perhaps even the dodo is capable of seeing the impending international currency collapse or the death of fiat currency.

Monty Pelerin http://www.economicnoise.com

Tyler Durden’s report on this event is below:

Tiny Mauritius Tells US To Shove Its Dollar, Buys 2 Metric Tons Of Gold From IMF At $1,115 An Ounce
Tyler Durden’s picture

Submitted by Tyler Durden on 11/16/2009 20:07 -0500

The latest development in the gold bubble saga, and one which will likely cause the precious metal’s price to spike even higher, comes from the tiny island of Mauritius which according to Dow Jones has purchased 2 metric tons of Gold from the IMF for $71.7 million. The price works out to approximately $1,115 per ounce. More as we get it. (and yes, this is a picture of Mauritius not some CNBC anchor hangout).

Some more from Dow Jones:
The International Monetary Fund announced Monday it has sold two tons of gold to the central bank of the Indian Ocean island of Mauritius for nearly $72 million.

The sale came as gold prices surged Monday to an all-time high of $1,136.72 per ounce.

The sale to Mauritius “was conducted on the basis of market prices prevailing on November 11, 2009 with proceeds equivalent to U.S. 71.7 million dollars,” the IMF said in a statement.

It was the second such sale by the fund since September, when its executive board authorized the sale of 403.3 tons of gold from its holdings to bolster its finances amid the global economic crisis.

On Nov. 2 it sold 200 tons of gold to the central bank of India for $6.7 billion.

The IMF said it would sell gold directly to central banks and other official holders for an initial period before selling the remaining amount on the open markets “in a phased manner over time.”

The Washington-based IMF, which currently holds just over 3,000 tons of gold, is the third-largest official holder of the precious metal after the U.S. and Germany

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