|
Some comments by John Mauldin towards the bottom of a recent article reflect popular
opinions about money that can be summarized as: "a growing economy needs
a growing money supply" and "there isn't enough gold in the world
for gold to be used as money today". These opinions reflect a basic
misunderstanding about money.
Here are the Mauldin comments to which we are referring. We've put notes
below each excerpted comment, but the main part of our response is further
down the page.
"The current structure of Bitcoin
carries the same inherent flaw that gold does (and to some extent the euro,
too): in a world of ever-increasing abundance, gold is massively deflationary
and provides unreasonable "rents" to those who hold it. Even given
that inherent flaw, it has been the most stable store of value for millennia."
[Our note: The last sentence in the above excerpt contradicts the first
sentence, in that gold cannot be "massively deflationary" and at
the same time be a "stable store of value".]
"...if we were to decide to use gold
as the sole basis for our currency, we would have to value it at some order of
magnitude higher than it is today in order not to create massive deflationary
instability. IÂm not sure that $10,000 or even $20,000
per ounce of gold would be nearly high enough, given the massive amount of
sovereign debt in the world."
[Our note: There will only be a realistic chance of gold again becoming money
after the market has re-valued gold to the point where the price of gold is
consistent with the quantity of fiat currency. In other words, once things
get bad enough to create sufficient popular support for a return to gold
money, no re-valuation will be necessary.]
"But even supposing that we (as a
global system) could somehow manage to deal with the logistical nightmare of
moving to a single, physical, commodity-backed currency, future growth in the
world would soon overwhelm the limited supply of gold, and the prices of
goods and services would deflate over time, creating their own backlash.
History buffs will recall William Jennings Bryan and his famous cry, "We
[mostly referring to farmers] will not be crucified on a cross of gold!"
[Our notes: 1) The prices of goods and services are supposed to deflate over
time. That's a natural effect of economic growth. The computing and
mobile-communications industries are classic examples. Where's the backlash
against plummeting prices for high-tech equipment and software? Not from
consumers, that's for sure. And not from producers such as Apple and Google,
which are generating huge profits. 2) The election slogan of an
economically-illiterate politician cannot rationally be used to support a
monetary or economic theory!]
"Now some might see ever-falling
prices as a good thing, but they would induce a different type of instability
in the system. Given the overwhelming extent of global debt, I think the
chances of moving to a physical currency based on gold are slim to none, and
Slim left on the morning train. Go back and read the economic history of the
latter half of the 1800s in the US. From one point of view it was a golden
era of growth and prosperity driven by huge leaps in technology. But it
created serious problems for many of those on the lower economic rungs. If
you think income inequality is a problem today, then you wonÂt like what happened in the late 1800s."
[Our notes: 1) Refer to our recent blog post for an outline of
what actually happened during the late-1800s. It definitely was a
"golden era of growth and prosperity", but it would have been even
better if not for three financial crises. These crises were primarily due to
fractional reserve banking and secondarily due to the government's
misdirection of investment (subsidising the building of uneconomic railroads,
for example); they were not due to having gold as the basis of the monetary
system. 2) Income inequality, per se, is never a problem. Without income
inequality there would be no incentive to work harder and smarter or to
engage in entrepreneurial activities. The problem is the income inequality that
stems from monetary inflation and special (government-granted) privileges.]
"The leaders of that era came
together to try to create a new system that could prevent the frequent panics
and crashes that were inherent in the financial system of the day, and
eventually we got the Federal Reserve and other ostensible improvements."
[Our note: No, bankers and politicians of that era came together to create a
new system that would enable greater balance-sheet expansion by the banks and
greater deficit-spending by the government.]
"But that does not mean the current
system of central banks and fiat currencies does not have its own flaws. We
should not limit our thinking to the economic systems of the past or present
as we think about a future economic system. How do we create a truly stable,
equitable, and efficient basis for exchange?"
[Our note: There is no "we" that has to sit down and plan-out a new
monetary system. The best system will be the one chosen by the free market if
the government gets out of the way and banks lose their special privileges.]
The main point to understand is that once something becomes the general
medium of exchange (money), any amount of it is as good as any other amount
of it. The reason is that the service provided by money, that is, the ability
of money to facilitate indirect exchange, isn't altered by a greater or a
lesser supply. To further explain, what the holders of money want is a
certain amount of purchasing power, not a certain quantity of monetary units.
In terms of the ability of money to fulfill its primary purpose, X units of
money with a purchasing power of Y per unit are no better or worse than 2X
units of money with a purchasing power of 0.5Y per unit.
By the way, we aren't saying that an increase or a decrease in money supply
doesn't matter, as major economic problems clearly result from rapid
increases or decreases in the money supply. What we are saying is that once
something has become the most commonly used medium of exchange, increasing
its supply provides no benefit to the economy and is most definitely not
required to enable real economic growth.
For a fuller explanation of why any economy-wide quantity of money is no
better or worse than any other economy-wide quantity of money, refer to Frank
Shostak's article at http://mises.org/library/how-much-money-should-there-be.
In conclusion, we are inclined to say that money-supply stability is the
ideal, but that wouldn't be completely correct. Although it could reasonably
be argued that a stable money supply would be a vast improvement on what we
have today, it would not be the optimum situation. For example, the current
monetary system is so unstable that maintaining a constant money supply while
keeping everything else in place would quickly lead to monetary and
financial-system collapse. Instead, the optimum situation would be for the
free market to determine what is money and the supply of money. Currently,
the government determines what is money, and the supply of money is mostly
determined by the ability and the desire of the banking establishment (the
central bank and the commercial banks) to create money out of nothing.
Regular financial market forecasts and
analyses are provided at our web site: http://www.speculative-investor.com/new/index.html
Also, free samples of our work (excerpts from our
regular commentaries) and additional thoughts on the financial markets (and other
stuff) are providedat our blog:http://tsi-blog.com/
|
|
