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Source link: http://archive.mises.org/16346/is-inflation-harmless-or-even-good/

Is Inflation Harmless or Even Good?

April 4, 2011 by

A Fed employee argues that inflation is harmless. I argue that it is a rip-off for everyone who uses dollars. FULL ARTICLE by Robert P. Murphy

{ 61 comments }

William P April 4, 2011 at 8:50 am

Dr. Murphy is absolutely correct, of course.

However, how many of you think the system can perpetuate itself (in its current form) for much longer? Consider that debt is at $14.2 trillion and climbing, we’ve yet to feel the full force of yet another massive entitlement program in Obamacare, there is a $1.6 trillion deficit this year alone, and a Fed’s balance sheet is already completely lopsided. Home values continue to plunge, and now inflation is picking up.

It just seems to me that such a precarious scenario can only persist for so long, before it causes major global power disturbances, like military action. What if China, Russia, or God forbid some rogue state want to assert a little more power? Are we still in the position to stop them? Or will we acquiesce, and turn inwards and isolationist like the 1930′s? Stagnation aside, herein lies the true danger of poor national finances.

I’m convinced, to quote that jazz standard, “something’s gotta give” with our system or the global outlook, sooner rather than later. Anybody feel similar?

RichF April 5, 2011 at 9:08 pm

Not exactly. The last thing I am worried about is not being able to fund foreign, military adventurism.

Emanuele Montanari April 4, 2011 at 9:35 am

I’m thinking over this question (and possible answers).

What can you really infer from relation between nominal wages and prices over time, from 1948 up to now?

I mean, technology really made huge advances.

For example, 5 men could make 50 kg of bread per night in 1948? How many kilograms of bread per night can make today 1 man, two/three machines and 1/2 operators to look after machines?

And so the real question is (but you can hardly answer it): what advances have technology have made if the FED had not inflated?

The problem is that you will always find an Andolfatto saying: look! What’s the problem? You are better-off than in 1948!

And maybe you will find someone who dares to say: look! What’s the problem? You are better-off than in 1948! Thanks to inflation!

Emanuele

J. Murray April 4, 2011 at 9:39 am

Right. It’s not that we’re better off today than 70 years ago, but how much worse off are we today with inflation than without it.

Gil April 5, 2011 at 12:00 am

That’s an impossible assertion.

“Gee if we had a gold standard and the annual salary is still around $370 a year then blu-ray technology would found in the bargain bin because it’s so old.”

Where’s the proof that companies have been held back because of the lack of a gold standard? Since most companies borrow to expand then inflation is no skin off their nose.

J. Murray April 5, 2011 at 5:06 am

Where’s the proof that what we do now is better?

What’s seen and what’s unseen. Economics cannot be placed in a laboratory and studied. No control group exists in which to compare one policy against another. Therefore, it’s best to not allow any government to interact with one as we can never tell the proper path.

Per Bylund April 4, 2011 at 10:29 am

Emanuele, I didn’t see your question before I submitted my comment. I made the same observation.

bobobberson April 4, 2011 at 2:06 pm

Yes, what about the decades long deflation of computer and electronics prices even with inflation running counter the whole time. If prices have been dropping 4% a year, and inflation going at 4% a year, in reality it should have dropped 8%.

Walt D. April 4, 2011 at 10:10 am

When most people hear the word inflation they think of rising prices (although you are told that gas prices and food do not count). However, inflation is a monetary phenomenon caused directly by the action of the Fed. So why do they do it? – to rip people off. Usually, they like to do it slowly, hoping that nobody will notice.
Suppose one day that the Fed decided to double the amount of money in every bank account, and told you that you could cut dollar bills in half and spend each one like a dollar. What do you think would happen? According to Paul Krugman and other government economists the answer is nothing.
Do you believe this?

Per Bylund April 4, 2011 at 10:25 am

What I find interesting in these statistical stunts with data over time, like the graph of wages vs. prices (CPI) since 1948, is that they always assume (and seem to believe) that all else is constant. Well, it isn’t. We can assume things like technology and the productivity of labor (these concepts are related, of course) are constants so as to identify correlations and, perhaps, causation. But Andolfatto seems to say (not having read the original piece) that: “Look, wages increase more than CPI, therefore nobody’s hurt by inflation.” Well, that’s like saying any laborer in 2010 would have to work three hours to be able to buy a DVD for his home theater, just like any laborer in 1920 would also have to work [only] three hours to buy a DVD for his home theater.

Obviously, this doesn’t cut it. There were no such things as DVDs in 1920 – we’ve seen enormous progress 1920-2010. And even if there were such things as DVDs back then, they would have cost a fortune (assuming cost drives price, which mainstream economists do) simply because there was no technology to efficiently produce DVDs.

The problem here is that (a) CPI does not measure the real increase in the “price level” (whatever that is) since all products are not included and availability as well as buying habits change, and (b) prices tend to go down over time. Prices fall because labor gets more productive and therefore the trend must be that we should be able to always afford more stuff working fewer hours. All change is mysteriously gone in these statistical analysis, and mainstream economists relying on them seem to actually believe (considering their arguments) that things are exactly the same today as they were 100 years ago – only all dollar amounts are bigger (20x bigger).

André April 4, 2011 at 12:04 pm

That’s correct, but it might also be taken the wrong way. I mean, since there were no blu-ray discs in 1920, then it is meaningless to compare the value of dollars today and back then.
A normal, everyday meal is a rather understandable unit of value. It might be made of bread and beans, or of one hamburger, or mayfly larvae with leaves – but still is a rather universally understood concept now, in the twenties, or in New Guinea. Do not try to establish how many DVDs you could buy with one day of unqualified manual work a hundred years ago – instead see how much of your salary you had to renounce, in terms of dollars, to buy yourself a simple, average meal.
Let us compare prices of fundamental goods of human life – like a daily, ordinary meal, or a place to call “home”. The technology behind those things changes, sure. But still I think it makes sense to compare those concepts and see the obvious, negative effects of inflation and devaluation.

Walt D. April 4, 2011 at 12:29 pm

Andre:
I think what you said is true.
However, the important point is That the CPI is deliberately rigged to show no (price) inflation.
There are two fundamental ways in which the CPI is rigged.
Substitution – I don’t have to buy $4 a pound hamburger, I can buy the $0.99 a pound chicken on special offer. I don’t have to buy Chateau Lafite I can buy Gallo jugged wine. Jeff Tucker does not need to buy Iberico acorn-fed ham, he can buy spam – or let him eat cake! :-)
Technology Improvement – my entry level computer that cost $500 has 4GB of Ram and a 500GB hard drive. a similar system 5 years ago would have cost $5000. Therefore my cost of computing has gone down.
The universal principle is that if the price of energy goes up and the price of food goes up, your standard of living goes down. Hence the reason to rig the numbers in the CPI.

J. Murray April 4, 2011 at 2:50 pm

It’s used the other way around a lot of times. The Chateau Lafite only went up in price 1%, so you’d buy that over the Box’o'Wine that went up 5%. The numbers somehow assume you’ll buy something just because it didn’t go up as much as the alternative.

Walt D. April 5, 2011 at 11:16 am

J.:
The supermarket has another strategy.
These are actual current price – Hamburger $3.99 a pound, on special T-Bone steak select $4.99 a pound , choice $6.99 a pound. I end up buying the choice at $6.99 by the following decision process – I,m not going to pay $3.99 for hamburger when I can get a T-Bone steak for $4.99. My choice is then between paying $4.99 or $6.99. I usually go with the $6.99 select since there is a noticeable difference in taste.
The other way around rising prices is less cereal in the (same large) box for the same price and smaller candy bars for the same price. The Dollar Store even has custom sizes (smaller) so that they can sell everything for $1.
High end restaurants are now in trouble, particularly in London – people are still eating out but they have cut out the expensive wine – there is a 15 pounds profit on a 20 pound bottle of wine.
Mexican celebrity chef Rick Bayless also had a good quote “truffles – they’re not good – just expensive”.

Gil April 5, 2011 at 12:04 am

Or should it be said that mild inflation is no impediment to productive growth?

Greshams-law April 4, 2011 at 10:48 am

If it’s any consolation, the market will probably give back some of that $0.95 lost over the past 100 years (for at least a brief period of time). To quote Mises:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Even if the final collapse were to involve a vicious inflation; in my mind, the journey to it wouldn’t be straight up for asset prices (and straight down for the dollar).

Juraj April 4, 2011 at 11:52 am

Thanks for the quote. Ten years ago when I read these lines first time and had little knowledge of economics and money, I was hit by the fortitude of that von Mises’ statement. I never thought in my life I’ll be seeing the collaps of the monetary system in Europe and USA and watching it day after day through the news channels like zerohedge.com or mises.org . I wish von Mises was alive to see and comment it.

Actually, the statement in the title was (is?) a part of the official attitude of the professors teaching economics and theory of money at my university in the former Czechoslovakia who were trained in the dialectics of keynesianism and monetarism. Answering the question with other adjectives as those from the title was not reasonable.

J. Murray April 4, 2011 at 11:57 am

It won’t really give back any of it. The goods and services obtained and consumed from the marketplace are already gone.

Greshams-law April 5, 2011 at 3:35 am

Yes, although I didn’t mean it like that. I just meant that (surviving) dollars could rise in value to regain some of the ‘lost ground’..

Free Radical April 4, 2011 at 1:34 pm

I agree that there is no means of avoiding the final collapse of the credit expansion boom but what I think most people don’t notice is that the collapse is where the central bank really cashes in. Consider a simple example. The Fed lends you $200,000 to buy a house for 1 period at an interest rate of 10%. When their plan works as described, they print $200,000, give it to you and then one period in the future you pay them $220,000 which they “retire.” Notice that this system is contractionary in the long run and requires increasing rates of money creation just to stave off a disruptive deflation. The collpase comes when there is no longer enough borrowing to hold this off. Then the value of your house falls to $100,000. At this point instead of paying back the $220,000 you just walk away (either because you make a calculated decision or because you can’t pay because your wages, other investments, etc. have fallen). The Fed reposesses your house (I cut out the middlemen in this example). Now instead of just printing and then retiring currency, they are siphoning off real assets from the economy. What’s more, in order to prop up prices they will have to engage in “quantitative easing” which means printing money to buy assets outright. The bottom line is that the Fed’s balance sheet (the real wealth that they own) expands during downturns. I’m not convinced that they mind this so much…

Greshams-law April 5, 2011 at 3:48 am

Hmm, I’d honestly imagine otherwise. I would expect that they’re rather scared about expanding their balance sheet, but – falsely – deem it to be ‘necessary’. I think that they’re fairly well-intentioned, but hopelessly misguided.

When the Fed expands its balance sheet, it doesn’t take on ownership of those assets; rather, those assets join the stuff that ‘backs’ the stock of dollars. The enlarged quantity of dollars becomes ‘good for’ the augmented stock of assets. [Incidentally, I contend that - for fiat currencies - they always expand the liabilities (dollars) by 'more' than the assets] I wouldn’t think that they get any material benefit, but rather to the contrary, that they risk their posts as they enrage more and more people like us!

billwald April 4, 2011 at 12:07 pm

The essay does not sufficiently differentiate between money inflation and the work hours required to obtain sufficient food, shelter, and clothing (and medical care?). No one needs a or and other toys.

Nor does he sufficiently explain why money supply needs to increase as the population increases. A steady money inflation that paces population can be statistically (?) handled by both lenders and borrowers. For example, long term inflation is factored into the interest paid on long term loans and long term bonds (the rental of money).

The essay sort of mentioned the value of labor with respect to productivity. In the post WW2 years when labor unions were growing and productivity was increasing US labor got most of the value of increased productivity and optimism of the working class was high. The workers got to smart for their own good (we are middle class and don’t need any evil labor union) and in the last 20 years the owners and lenders have retained 80% of the increase from productivity gains . . . even disregarding jobs being sent off shore.

SAVINGS LOSS – Dr. Murphy does not understand that the function of money no longer includes storing wealth. People who save (hoard) cash money SHOULD be losers in in this electronic money economy. Any description of our new electronic economy needs to explain why the US stock market rises and the US rich get richer while the wages and standard of living of the working class (and the percentage of people in the middle class) is dropping. Why are the new hires at GM willing to accept half the old pay rate and work for $10/hour while the cost of food and fuel is jumping?

Daniel April 5, 2011 at 9:16 am

“hoard”

Seriously? Money is NOT wealth, you moron. Now try to find out what are the consequences of that before you assault other people’s with your posts, you cretin.

Daniel April 5, 2011 at 9:19 am

Typo: other people’s brains that is

joe blowe April 4, 2011 at 12:31 pm

Would like to present two other points:
- One is that inflation is a result of an algebraic sum of the ‘true inflation’ minus the ‘true deflation’. Deflation comes about from improvements in the manufacturing methods, mining process etc. The price of consumer goods has fallen over time, Moore’s law for computer memory comes to mind. Inflation, of course comes from printing money.
The declared inflation rate is the algebraic sum of these two factors.
If we have a 3% deflation, and a true 5 % inflation, one ends up with a 2 % net declared inflation rate. But whoever printed the money ( we know who ) got to print 5 % ! Bonus.
The consumer gets some of the benefits of technology improvements, but not all of it since some proportion is eaten up by inflation.

- Another point is that in light of the US Dollar being the reserve currency of the world, the total inflated ( read printed ) value is a percentage of the total dollars in circulation in the world, which is about 5 times perhaps the amount of dollars circulating in the US. So, the FED can print 5 % of about 55 Trillion US dollars, not just 12 Trillion from the US base.

Dave Albin April 4, 2011 at 12:58 pm

Another part to all this is the education factor. Nearly all of the increases in wages and salaries go to people who went to college and graduated – whether the college education increases their value in the marketplace or not. Licensing, certificates, and government jobs play a huge role in this. The result is that wages rise for one group of people at the expense of another, and those left behind are caught up living with inflated prices.

Del Lindley April 4, 2011 at 4:03 pm

What you say has been true but there now is a growing debate (as the cost of “higher” education has risen despite declining quality/relevance) as to whether the time spent out of the workforce (for this education) is rewarded sufficiently by an eventually greater income.

The fact that the “education factor” has undoubtedly grown in the US since 1948 is to me just a manifestation of a secular decrease in the American social time preference. This naturally explains the increase in the real wage over this time.

The real question is: How was it possible for the social time preference to decline in the face of so much monetary inflation (and implicit/explicit wealth redistribution)? I believe that the Austrian school needs to explain how this can be possible, i.e. how the final crackup boom can be (seemingly) delayed indefinitely.

Anthony April 5, 2011 at 11:06 pm

The crackup boom can be delayed as long as people retain their faith in the currency in question. Because the US dollar is the world reserve currency it has been given a lot more slack then most currencies have. That being said, with the exponentially increasing growth of both the money supply and the debt the clock is definitely ticking.

In answer to the rest of your question, I would say only that without wealth distribution and inflation things would have been much better then they already are. Compared with many other countries the US has historically had less redistribution of wealth.

Eric April 4, 2011 at 1:27 pm

The article’s comparison to the counterfeiter with the color printer is the key argument. It’s the only one I’ve found that gets people to say, “OK, I see your point”.

Usually, one has to refer to the FED as a LEGAL counterfeiter and then ask:

“But what’s the ECONOMIC difference between what the FED does and what an illegal counterfeiter does?”

If one simply calls the FED a counterfeiter, one always gets an argument (from a government supporter). But when you point out the economic results, whether legal or not, some finally get it.

But I’ve only got one person in 10 years to do a full 180 using that point, while others still say: if it’s the government then it’s ok.

Del Lindley April 4, 2011 at 4:25 pm

The problem here is that the strength of the counterfeiting argument is proportional to the perceived crassness of the counterfeiter. If every government worker were furnished with a fancy sports car and unlimited designer clothes then there would be little trouble in seeing the parallels between Dr. Murphy’s example and the Fed. So long as voters see government transfer spending in a nurturing, caring, maternal light the counterfeiting comparison is not going to work.

Eric April 4, 2011 at 10:24 pm

You’re right. Just as most people don’t mind our military killing foreigners, or the police beating up people they don’t like, they see the counterfeiting FED as spending the bad script on them.

Sometimes, though, I add to the argument:

After someone prints these counterfeit notes, they then buy your car, and stick you with the bad stuff. If you find out and call the cops, they’ll thank you and confiscate your counterfeits with you taking the loss. And don’t try to pass them off on others, because the feds will then treat you just as severely as the counterfeiter. Now replace this counterfeiter, with the FED and you can see the damage they do.

It’s also interesting that the secret service has two jobs, catching counterfeiters and protecting the king. I wonder which is their priority?

Del Lindley April 4, 2011 at 11:31 pm

To answer your question I think it is clear that the SS agents are trained to take a bullet for the living president, not for the ones that are already dead.

Shay April 5, 2011 at 9:06 am

So long as voters see government transfer spending in a nurturing, caring, maternal light the counterfeiting comparison is not going to work.

Indeed; one can just look at money printing as equivalent to taxation in terms of redistributing wealth through force. So if one approves of taxation, one would approve of this, but not approve of an (illegal) counterfeiter.

F. Beard April 4, 2011 at 7:09 pm

@Bob Murphy,

So should the money supply be fixed or should it depend on the mining rate of a shiny metal? And if the later, then are the miners counterfeiters?

Or is the problem not money creation per se but legal tender laws and the capital gains tax which compels us to use government fiat even for private debts?

Inquisitor April 4, 2011 at 7:48 pm

But no one is forced to accept gold-backed notes. We -are- forced to accept Fed funny money (or the Euro/£ in my case) as legal tender. I can say no to gold in a free market. I cannot say no to legal tender now.

F. Beard April 4, 2011 at 7:58 pm

But no one is forced to accept gold-backed notes. Inquisitor

Not so. Believe it or not, one way or another, you would still be forced to take gold fiat for private debts. For instance, what about your taxes? Do you think the government will spend in gold and tax in fiat? No, it would do both and for the average person it would be a wash EXCEPT for gold miners and the usury class since PMs, being non-performing assets, REQUIRE usury to generate a return. But usury is forbidden in the Bible between fellow countrymen ( Deuteronomy 23:19-20 ) and moreover is mathematically unsustainable since the debt growths exponentially but the real economy cannot.

Anthony April 5, 2011 at 11:09 pm

The economy can (and has) grown exponentially. Whatever else you want to keep from your argument you should at least drop the “mathematically impossible” bit.

F. Beard April 5, 2011 at 11:35 pm

The real economy, according to Dr Michael Hudson, grows in an “S” curve, slow at the beginning, fast in the middle and slow at the top. An exponential curve does not flatten at the top.

But even assuming the economy does grow exponentially then its rate of growth is still less than the growth rate of the debt, according to Karl Denninger, so usury is still unsustainable.

That’s why debt forgiveness is NECESSARY with usury else the money lenders end up with everything.

F. Beard April 4, 2011 at 7:39 pm

You supporters of a government enforced gold standard are for counterfeiting too. You wish to counterfeit government money with gold or silver. A quick lesson in ethical money creation for you:

1) Government money should be pure fiat but only legal tender, in fact as well as law, for government debts, taxes and fees, not private ones.

2) Private monies should only be acceptable for private debts, not government ones.

It’s not my idea; it comes from Matthew 22:16-22.

Nate Y April 5, 2011 at 12:56 am

Someone here is in favor of a government enforced gold standard?

F. Beard April 5, 2011 at 6:33 am

Someone here is in favor of a government enforced gold standard? Nate Y

Mises himself was according to this:

Mises, in contrast, made a utilitarian case for the gold standard, while recognizing gold’s drawbacks: Mises defended the gold standard, not because he considered it ideal or because he thought fiat money immoral, but because hewas convinced that a managed fiat money would prove less stable than gold http://www.cato.org/pubs/journal/cj19n2/cj19n2-4.pdf

I suppose Gary North is an Austrian?

“The government does have the right to establish the form of money that citizens must use to pay their taxes. The government should limit itself to a statement regarding the weight and fineness of the tax coins. If private enterprise produces coins that meet these standards, the government must accept such coins as valid for the payment of taxes. The government lawfully controls the form of taxation; but it should not have any power to monopolize the production of coins. Governments have always asserted this authority, and they have always done so to the detriment of liberty.” Gary North from http://www.lewrockwell.com/north/north895.html

If the government requires taxes to be paid in gold then that is a de facto government enforced gold standard.

J. Murray April 5, 2011 at 7:46 am

That’s not really a gold standard. A gold standard is making gold the monopoly tender of the land. If private individuals are free to utilize other forms of currency, yet only pay out the taxes in the government’s preferred form, then there isn’t a gold standard at all since citizenry and businesses can simply purchase the necessary coinage accepted by the tax authority with their preferred currency. So if the market choses to use silver coins, but the tax authority only accepts gold, there’s no gold standard as the market can just buy gold coins with silver coins to cover the tax.

F. Beard April 5, 2011 at 8:16 am

A gold standard is making gold the monopoly tender of the land. If private individuals are free to utilize other forms of currency, yet only pay out the taxes in the government’s preferred form, then there isn’t a gold standard at all since citizenry and businesses can simply purchase the necessary coinage accepted by the tax authority with their preferred currency. [bold added]

And just why should gold be given that privilege? And why shouldn’t the government’s own fiat be used for taxes since it is far less expensive and favors no one’s favorite shiny metal?

If gold must be purchased to pay one’s taxes, is that not a government subsidy for the price of gold?

So, are the Austrians in favor of government subsidies?

BioTube April 5, 2011 at 8:59 am

Who, exactly, would take accept the government’s worthless fiat except under pain of death? The whole point of taxation is the raise funds, which your little scheme is completely useless at doing – even without legal tender status for anything, tax liabilities would still need to be denominated in something accepted by the market.

F. Beard April 5, 2011 at 11:43 am

So what is it, followers of Mises, are you libertarians or should taxes be collected in your favorite shiny metal?

Cat got your tongues?

Colin The Bear (Australasia) April 4, 2011 at 9:48 pm

I’d like to add to this, that the destructive inflation since 1948 has also added to the DYSSAVING, which is the reason that the wage level is ONLY 2.5 times the price level of 6 decades ago. If money had NOT been debased all of those years and people encouraged to save, think what the multiple MIGHT have been. REMEMBER that the wages are higher because of the increase in the productivity of labour through CAPITAL investment which is very MUCH DSCOURAGED by inflation. Workers today are no faster, they just have more machines!
GO the Austrians!

Shay April 5, 2011 at 9:11 am

Yes, this is something somewhat ignored: it’s not just that had there been no inflation that we’d be where we are now, only with lower prices; all along the way we’d be better-off and thus be much further along than we are now.

F. Beard April 5, 2011 at 9:14 am

Who, exactly, would take accept the government’s worthless fiat except under pain of death? BioTube

Let’s see. Suppose you drive to a gas station and buy some gas with your gold (assuming they will take it). The attendant then says, “There is a $.40/gal tax payable in the government’s fiat” But you only have gold. Oops! No gas for you. Maybe you should have bought some fiat, eh?

The whole point of taxation is the raise funds, BioTube

Wrong! The government/Fed combination can create all the funds desired. The purpose of taxation is to create demand for those funds so as to give them value.

which your little scheme is completely useless at doing – BioTube

My little scheme? It follows directly from Matthew 22:16-22! Argue with the Lord, will you?

even without legal tender status for anything, tax liabilities would still need to be denominated in something accepted by the market. BioTube

As I pointed out with the gas station example, government fiat would be accepted by the market; for its only proper purpose, to pay government debts, taxes and fees.

F. Beard April 5, 2011 at 1:06 pm

“Advancing the scholarship of liberty in the tradition of the Austrian School” this site’s logo

What is libertarian about requiring that we pay our taxes in gold?

Liberty for whom? Gold miners? Usurers?

Anthony April 5, 2011 at 11:15 pm

Liberty for gold miners and userers is perfectly consistent with libertarianism. If you think that people should not have the “liberty” to lend money and charge interest in a free society then you are the one who is opposed to freedom.

F. Beard April 5, 2011 at 11:25 pm

Liberty for gold miners and userers is perfectly consistent with libertarianism. Anthony

Of course but government privilege for any comes at the expense of the liberty of all others.

If you think that people should not have the “liberty” to lend money and charge interest in a free society then you are the one who is opposed to freedom. Anthony

Without governemnt privilege for usury, I doubt it would be a major portion of the economy. With genuine liberty in private money creation, why would anyone (who could – real capital is the only thing required) rent a money supply when they could create their own?

King George April 7, 2011 at 10:40 pm

I think that debt doesn’t rise exponentially when you have a free market of money, because the relationships are many to many rather than all of the debt leading back to a single source. With a free market in money, debt would be of utility only for productive investments that can return more than economy growth. Otherwise there would be no reason to borrow. It won’t be like today where 30 year mortgages are required to buy a house because easy credit has pushed the prices up there to begin with.

F. Beard April 8, 2011 at 7:52 am

Bingo!

F. Beard April 5, 2011 at 10:41 pm

Actually, some money creation is good but only if done ethically.

Consider common stock as a private money form. On one hand, the stock holders would not want to dilute their stock with new stock issue but OTOH there might be performing assets to buy that in the longer run would increase the value of their stock. So they vote on it. That’s ethical money creation.

Now let’s consider unethical money creation. Suppose the government enforces a gold-standard. Suppose a company patents a new method to extract gold from sea water that is fabulously efficient. The company then spends that gold into the economy causing massive price inflation. That’s unethical money creation even though gold is used.

King George April 7, 2011 at 10:42 pm

That’s why gold should be freely chosen but never enforced. The precious metals have a lot of great qualities, but the market (and the people by extension) should always have the free choice. Technology is changing a lot of things and something else might come along that is superior to gold.

Colin The Bear (Australasia) April 8, 2011 at 7:44 am

To what Utopian land do you belong?
Government deserves NO trust!
Money creation from thin air is fraud practised as an INTERNATIONAL norm!
Hey ignorance is Ubiquitous! Fraud is a natural tedendency in Bureaucracies.
Mining of GOLD requires effort and expenditure! Mining the means of exchange is another enterprise on the market, the same as building cars or computers.
If one mine is more productive than others, it’s just the same as one vehicle manufacturer being more productive than others. Higher productivity leads to lower prices!
Money SHOULD be a COMMODITY (gold, silver, whatever) that one uses as a means of exchange. The problem with paper (now digital) money is that the fraudsters control it and the ignorant proletariat accept that the fraudsters can do whatever they wish with the amount of it!
Gold FORCES accountability and restricts the Dictating Fraudsters. That is the essential superiority of GOLD. Nothing else. If you could trust your Government (HA HA) paper would be OK. But hey, look at the explosions of M3 etc! Who do you naively believe created that wad of FIAT currency? In Australia between 1984~2007, M3 multilied 10 FOLD, YES TEN fold! Trusting GOvernments is like trusting a randy Rabbit Buck with a virgin Doe!
Remember my words:
Optimism is born of blissful ignorance.
Pessimism is the product of bitter experience!
Also:
It is better to be unknown as a fool than to write a blog and remove ALL doubt!

F. Beard April 8, 2011 at 8:15 am

It is better to be unknown as a fool than to write a blog and remove ALL doubt!

I agree.

However, the definition of a fool is someone who refuses to learn, not someone who may be ignorant.

F. Beard April 8, 2011 at 9:09 am

To what Utopian land do you belong?

The USA, the supposed land of the “free and the brave”.

Government deserves NO trust!

A common human condition it seems. The solution is decentralization. I believe in true decentralization and true diversity in private money creation. Our choices should not be just fiat or PMs as Ron Paul advocates.

Money creation from thin air is fraud practised as an INTERNATIONAL norm!

Where is the fraud? Fiat promises to be accepted for government debts and so it is. But there is theft since currently fiat is legal tender for private debts also.

Hey ignorance is Ubiquitous!

No comment.

Fraud is a natural tedendency in Bureaucracies.

Perhaps, but the solution to government over-spending is liberty in private money creation, not a shiny, scarce metal.

Mining of GOLD requires effort and expenditure!

Oh so difficulty of production is now a virtue but ONLY when applied to money? How odd. How about instead that we be truly free to reject government fiat if it is over-issued?

Mining the means of exchange is another enterprise on the market, the same as building cars or computers.

Wrong. What if I had a computer built of vacuum tubes instead of cheap silicon? Would that not be an extreme waste? Should the Earth be despoiled for mere money tokens?

[To be continued (perhaps)]

F. Beard April 8, 2011 at 10:21 am

“If one mine is more productive than others, it’s just the same as one vehicle manufacturer being more productive than others. Higher productivity leads to lower prices!” Colin the Bear

Fine. Let’s see how that works in a true free market of private money creation, shall we?

Suppose you own a gold mind and I have shares in a corporation. You coin your gold into a private money and sell it into the free market. OTOH, I go to a share holder’s meeting and vote to issue new shares to buy some new performing assets. The vote is in favor of new issue. Whose cost of money creation is lower, yours or mine?

F. Beard April 8, 2011 at 10:29 am

Money SHOULD be a COMMODITY (gold, silver, whatever) that one uses as a means of exchange. Colin the Bear

Commodity monies, if used as commodities are not money and if used as money are not commodities.

The problem with paper (now digital) money is that the fraudsters control it and the ignorant proletariat accept that the fraudsters can do whatever they wish with the amount of it! Colin the Bear

The problem is that fiat is de jure and de facto legal tender for private debts not just government ones, its proper use.

Nellie April 8, 2011 at 2:25 am

I’m convinced, to quote that jazz standard, “something’s gotta give” with our system or the global outlook, sooner rather than later. Anybody feel similar?

Considering that gold has gone from $500 and ounce to over $1450 in five years…while the average pay check is sucking wind…you tell me!

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