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I've never really got why a gradual deflationary bias
was a problem. Consumers know, for example, that just about any electronic
good (computers, plasma screens etc) will get cheaper in the future, yet this
does not seem to stop them from being made and bought. The fact that only
those people who really really want the good will
buy it and those are no so enthused will wait until it gets cheaper does not
seem to stop business from making money.
If it was conspicuous consumption fueled by debt (and an inflationary bias)
that got us into this mess, then would not a system with a deflationary bias
be the solution? It has a built in frugality: your money will have more
purchasing power in the future, so only buy today what you actually need.
People would also only want to take on debt if they were actually going to be
productive/efficient rather than just trying to bubble up asset prices. Now
maybe if we can convince Greenies that a Gold Standard would work against consumerism and thus
be good for the planet, we've got a chance.
The above thoughts were prompted by these comments left at this article Gold Standard ... Debunked or
Another Bubble?:
Dirk, on November 24,
2008 at 12:58 pm, said:
I’m happy someone gets it- that constraining global economic activity
based on a single metal that doesn’t really correlate to economic
activity makes no sense.
Clearly, the gold standard is deflationary in absence of either major gold
finds, or major negative economic shocks. More goods and services chasing a
fixed money pool will create massive downward pressure on prices. And
downward pressure on prices and assets equals lower incentives for
investment, more difficulty paying off debt, and a negative wealth effect
that creates real economic stagnation.
Inflation, on the other hand, creates pressure to invest money- not hoard it.
As long as a currency promises a future redemptive power, it will keep its
value. Perhaps fixing currency values to a “total energy” metric-
the sum of all oil, coal, gas, solar, nuclear, etc. reserves- would allow for
both economic growth and a guarantee of some future redemptive power for
something really useful.
16 Stanley Pinchak, on November 25, 2008 at 2:03 pm, said:
Wow so much muddled thinking in one place. It is amazing that my browser
didn’t pop up a warning.
1) Any stock of money sufficient to be accepted by the public as a money and
selected as the medium of exchange is capable of serving as money. There is
no need to grow the stock of money. Despite this false criticism, the gold
stock does grow at a predictable (by mining engineers) and low rate between
1% and 3% per year.
2) The purchasing power of a money is related to the stock of money and the
demand for money. Its purchasing power is also related to the supply and
demand for all other goods in society for which it is exchanged. Thus as
productivity increases, the purchasing power of a stable or slowly increasing
money will increase. This has the effect of making daily expenses of those
with debts easier to bear.
The only time a debt would become harder to pay off would be if the debtor
was in a field of employment where his pay decreased in line with the
increase in purchasing power of money. This might be a possibility, but at
the same time that human actors today judge their debt burdens based on
future expectations of income, those operating under a regime of increasing
purchasing power of money would be capable of determining their expected
future debt load capabilities. Those who guess wrong in such a situation are
no different than those who bite off more debt than they can chew under our
inflationary regime.
The biggest improvement that increasing purchasing power has is for savers
and those on fixed incomes. Savers would earn interest + the difference in
purchasing power between when they started saving and when they start
consuming. This is the opposite of today where the difference in purchasing
power subtracts from the interest and reduces the incentive to save. This
will have the effect of greatly encouraging saving and the stock of loanable funds, driving interest rates to natural and
sustainable low levels. This will benefit the saver/consumer in the future as
well as the entrepreneur and the durable good
consumer in the present.
Inflation on the other hand encourages debt based financing. It favors
instant gratification, but since there are fewer savers since debt is the
preferred method of financing, the purchases of today are not sustainable.
The increase in consumption fueled by new money is not fully offset by the
preferences of a ever shrinking class of savers who abstain from present
consumption. This results in a business cycle like we see continuously under
a system of bank credit expansion (ex nihlo).
Inflation encourages capital consumption and not investment as Dirk claims.
Empirical evidence of this is present in the dilapidated factories and
rotting machinery of the American Rust Belt.
3) All business cycles (as in repeated and not caused by something like war
or famine) are the result of fractional reserve banking and its concomitant
ex nihlo credit expansion. There can be no stable
and sustained economic growth under a fractional reserve banking regime.
There will always be over-expansion combined with malinvestment,
and and then retrenchment as the bad investments
are liquidated. Attempting to tie a money to a commodity standard while
maintaining a fractional reserve banking system is unsustainable. There will
inevitably be calls for the creation of a central bank and lender of last
resort as the bust causes bank runs.
The only viable solution is to realize that fractional reserve banking on
demand deposit money is clearly a case of conflicting views of a contract and
thus an untenable and invalid contract. How can a depositor demand a physical
object which the banker (rightly?) assumes is lent to him for his purposes. A
physical object must have a clear owner and can not
be subject to control simultaneously by two parties of differing opinion
under which direction to place the object. Thus demand deposits must be
maintained in a warehouse fashion with 100% reserve maintained at all time.
This eliminates the possibility of a bank run (in the historical sense and in
the practical sense of potential damage to the depositor). Furthermore by
limiting bank loans to funds deposited in time accounts (i.e. true saving)
there will cease to be a business cycle.
4) The idea of a world central bank is superfluous with a free monetary
system and 100% reserve banking. The main purposes of the central bank are to
ease governmental expansion and to act as a lender of last resort. A world
central bank will only lead to world bureaucracy. If banking is on a firm
economic and legal foundation, there is no need for a lender of last resort.
A world central bank is only an excuse for the establishment of world
government. It can not prevent world
wide business cycles while maintaining a fractional reserve banking
system. Furthermore, if it maintained a 100% reserve banking system, it would
still be subject to political considerations in open market operation and
would still cause misallocations of resources, though not of the intertemporal kind as explained by the business cycle
theory. The misallocations would result in privileged borrowers being able to
bid resources from those who obtain the increase in the money supply last.
5) The myth that a gold standard would limit growth is preposterous. One of
the greatest periods of economic (and population) expansion was obtained
under a gold standard and under a period of increasing purchasing power of
money (Cf. the 19th century). There is no theoretical nor physical
restriction on the growth of economy based on a sound monetary system besides
the subjective actions of individuals to save which allows for the
implementation of longer and more productive production techniques.
The claim that unemployment is higher under a gold standard is also ridiculous.
All non voluntary unemployment is the result of artificial restrictions on
the movement of labor or its price. One must be careful not to make the
mistake of comparing the unemployment rates of a central bank and fractional
reserve banking boom period to an average or bust phase unemployment rate
under the fractional reserve banking system which has persisted in the United
States prior to its inception. Under a free market, all labor wishing to be
employed will be. All state intervention attempting to reduce the ranks of
the unemployed can only be obtained by reducing the well being of other
actors in the economy. As such interventionist attempts to reduce
unemployment, though they may increase productivity (doubtful), will not be
optimal as compared ex ante in terms of the satisfaction of wants of all
economic actors. On utilitarian and natural rights grounds, state
intervention in the labor market is counterproductive, misguided, and should
be avoided.
6) The idea that there is not enough gold to back all of the fiat currencies
of the world is the most foolish statement of all. Logically one can take the
stock of gold available and divide it by the weighted sum (by exchange rate)
of the currencies of the world. This could provide backing for every single
dollar, ruble, yen, etc. However, this is a bad policy, for the market should
be left free to choose its own money, it should not be instituted from on
high via state decree or central bank policy.
All that needs to be done is to eliminate legal tender laws and taxes on
market selected monies. Since we have several thousand years of history
showing that Gold and Silver are typically selected as money, we should start
by eliminating taxes on them. If there is a push for a different medium of
exchange, it should be treated in the same fashion. At the same time, all
fractional reserve demand deposit banking must be subjected to traditional
legal principles regarding property rights.
This means a reversion to 100% reserve banking. From these two changes, the
market will perform the transition to a sound money with the minimum
disruption and transfer cost. A state imposed system can only result in
higher costs, as well as a retention of particular privileges for the state,
most commonly in the form of a central bank, liable to interfere in the money
supply through open market operations and subject to the political whims of
demagogues.
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint
as an Administration Officer in their Sydney
retail outlet. In 1998 he moved to Perth
to work in the then fledgling Depository division. He has held a number of
roles since then in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth
Mint in any way.
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