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Perhaps the most persistent modern monetary fallacy is the
belief that economic growth must be accompanied by a corresponding growth in
the money supply. This is cited as a reason why precious metals are
unsuitable for money in the modern age because they are not sufficiently
"flexible" due to their limited supply.
Paper money on the other hand can be printed in any quantity
imaginable and is therefore easily expanded to match the rate of economic
growth. Price stability is
an oft-spoken reason for deliberate expansion of the money supply. This is a
policy aimed at sustaining a year-over-year increase (widely accepted as 2%)
in the consumer price index.
But do prices need to be stable?
It is argued that if the public anticipates a general decline in
the prices of consumer goods, they will begin withholding their purchases.
When this occurs en masse the store shelves remain full and an economic
recession begins.
It is curious that such a belief is accepted as a sound economic
principle when evidence clearly shows the contrary. As the relative price of
a good or service decreases, it becomes accessible to a wider market.
Subsequently the demand for it increases.
Lower Prices = Higher Demand
The market for computers and information technology is an
example where innovative developments have out-paced the declining
purchasing power of paper money.
This has caused a decreasing price trend spanning several decades. As
expected, the market for these products has expanded greatly.
A larger number of people own more electronic devices and engage
in more long-distance communication than ever before. People didn't restrain
their purchase of a computer because the price would diminish - they bought a
second one.¹
The majority of people will continue buying goods and services
even if they believe that their money will buy more at a later date simply
because they want them now.
A second defense of the argument is that businesses will become
unprofitable if they are required to reduce the prices of their products. But
this argument assumes that businesses are non-adaptive and ignores the
obvious effect that reduced input costs have on profitability.
So if declining prices make economic sense, why is it argued
that the money supply must continuously increase?
To answer this, perhaps we should look at those who make such a
claim. Numerous official speeches from central bank leaders warn against the
economic perils of declining prices. Central bank officials portray
themselves as being ever-vigilant against this calamity.²
The act of printing money is of greatest advantage to those who
first receive the money because they benefit from its full purchasing power.
Those without this privilege must actually produce a good or provide a
service. The portions of the economy that are farthest removed from this
influx of new money only experience a general increase in prices. Effectively
their standard of living is reduced or they must work more to maintain the
same level previously enjoyed.
The creation of additional paper money is simply a
redistribution of income from later to earlier owners of the new money.
Central banks are amongst the first recipients through their monopoly over
the production of paper money. Understandably, they are the most ardent
supporters of the notion that declining prices are an economic evil to be
avoided.
The arguments against having declining prices in a marketplace
are not made with the sincerity of sound economics - they are made with the
duplicitous purpose of keeping the public appeased while transfering wealth
into the hands of those who control the money supply.
Notes:
1
Another example refuting the premise that prices must be stable is the rapid
growth of the United States economy during the latter half of the nineteenth
century which was accompanied by a continual fall in consumer prices.
2 Such
ideas are commonplace among academia as well. Interestingly enough, the most
prestigious award for the discipline of economics, the Nobel Memorial Prize
in Economic Sciences, is not actually one of the Nobel Prizes established by
the will of Alfred Nobel. It is endowed "in perpetuity" by Sveriges
Riksbank, the central bank of Sweden and world's oldest such establishment.
Mike Hewitt
Editor
DollarDaze.org
Also
by Mike Hewitt
Mike
Hewitt is
the editor of www.DollarDaze.org, a website
pertaining to commentary on the instability of the global fiat monetary
system and investment strategies on mining companies.
Disclaimer: The opinions expressed above are
not intended to be taken as investment advice. It is to be taken as opinion only
and I encourage you to complete your own due diligence when making an
investment decision.
©
2007 DollarDaze
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