Austrian economics = faulty due to paradox

[stefan_777]

Quote from nevadan:

Why? As long as there is a sufficient supply of gold to ensure that the physical commodity is available to facilitate trade, even with a finite supply of metal it would simply increase in purchasing power would it not? If the denominations of coinage were so high as to be worth to much, smaller coins could be minted or a metal of lesser value substituted as was the case with silver.

I think what I'm trying to get to is that making money out of metal is no better than paper.

If the metal becomes scares, you're saying the money that represents it could be pegged lower into smaller denominations. But your argument against the lucky few who have control over the money supply applies to the same people who decide the lesser level denominations of money. It's just as arbitrary!

In the long run, a gold standard looks like it could lead to a gold bubble due to the real economy outrunning the finite supply. This would mean tiny specs of gold could be worth thousands because of the increased valuation. If someone has a thousand dollars, and they decide to exchange it for the gold backing it up, they'll get a tiny amount, and further decreasing as gold becomes more scarce if the economy was growing (which I doubt in this scenario anyway)

Meanwhile, people realize that these tiny specs of gold backing up their paper money are absolutely ridiculous, and are amazed of they're highly arbitrary value. Gold is far more useless than paper in practical terms.

The paper that would be backed by gold is more practical than the tiny spec of gold that would be backing it up.

 

[scriabinop23]

Quote from nevadan:

I am a little puzzled by the idea that gambling on the value of currency seems a good idea. It seems contrary to the desire for stability and growth.

This brings us to one of the fundamental tenants of Austrian theory. It is the duty of government to ensure private property rights and the enforceability of contracts. Individual rights are the fundamental pillar of free society.

I was referring to us on ET gambling about the currency, not the good of society. Agreed.

On the government stepping in to regulate, which I agree with, it goes against human nature that they'll do it without corruption. Just like why communism didn't work. Allowing creative destruction, noninterventionism and enabling the market to correct price no matter the consequence just aren't consistent with a regulator existing. That's not how people work. It's all a fine line, but it breaks the concept.

Property rights and enforceability of contracts are great, but monopolies with their sheer strategic power can self-perpetuate even if all of those are totally enforced. Capitalism is war, and those with the most soldiers and best weapons win every battle and strengthen into perpetuity.

 

[nevadan]

quote from Stefan 777:
I think what I'm trying to get to is that making money out of metal is no better than paper.

If the metal becomes scares, you're saying the money that represents it could be pegged lower. But your argument against the lucky few who have control overn the money supply apply to the same people who decide at what level to peg the currency to the metal. It's just as arbitrary!

I don't think you understand the idea that the metal IS money, not that it represents money. The point is that no one controls the money supply if it is backed by something (in the case of paper notes backed by gold). It is only the case that the supply of money can be controlled when some individual or entity such as the Fed has the ability to add to or subtract from the total quantity of money. This is the key distinction in favor of a gold standard. It shackles the bankers by eliminating their ability to create money. Lending then becomes a function of expectation of interest profits and not a means of social engineering and central planning. If a commodity such as gold is used as money the supply of money is controlled by every individual and whatever quantity of money is in their possession. They are free to spend it or save according to their needs. So they may increase their wealth by saving or investing wisely, or spend it if increasing their store of wealth is deemed unnecessary.

 

[Voodoo-king]

Why are monopolies in a free society bad, if they engage in predatory pricing to keep rivals out consumers benefit and they grow weaker. The next rival will have a better chance. When monopolies are perpetuated with regulations or funded with taxpayers money different story.

 

[stefan_777]

Quote from nevadan:
I don't think you understand the idea that the metal IS money, not that it represents money.

You obviously misread my post, I said the paper represents the metal, not the other way around. I did refer to paper as money, which is what it is now. But from this point it's understood what we're refering to when we say money. Gold or metal.

The point is that no one controls the money supply if it is backed by something (in the case of paper notes backed by gold). It is only the case that the supply of money can be controlled when some individual or entity such as the Fed has the ability to add to or subtract from the total quantity of money. This is the key distinction in favor of a gold standard.

And who holds the majority of gold? Central banks. If gold is money, they have the most, and they would expand or contract the supply of gold into an economy. There's no difference from this than paper. Except they would only have a finite supply of gold. This goes back to my earlier unanswered question of what the heck is going to happen when the worlds money(gold in this case) becomes scarce as the economy naturally increases with the population. Stagflation and deflation obviously. A depression.

If a commodity such as gold is used as money the supply of money is controlled by every individual and whatever quantity of money is in their possession. They are free to spend it or save according to their needs. So they may increase their wealth by saving or investing wisely, or spend it if increasing their store of wealth is deemed unnecessary.

Okay, even if we could imagine a world without central banks right now, and everyone using their gold as money, what would happen when there's not enough gold to go around. The prices( amount of gold needed) of goods in the economy would fall. Deflation. People who build a house will receive less and less gold as the economy grows with the population. And eventually, tiny amounts of gold would be exchanged, for say, houses. That doesn't make sense, it's just gold, paper is no worse, at least you can expand paper to account for the natural growth of the economy as a result of population increase.

It would impractical and foolish, to walk around with gold dust in your pocket that could be exchanged for tangible goods, which actually have practical value, like food, cars, houses etc.

 

[nevadan]

quote from stefan 777:
And who holds the majority of gold? Central banks. If gold is money, they have the most, and they would expand or contract the supply of gold into an economy. There's no difference from this than paper. Except they would only have a finite supply of gold. This goes back to my earlier unanswered question of what the heck is going to happen when the worlds money(gold in this case) becomes scarce as the economy naturally increases with the population. Stagflation and deflation obviously. A depression.

Under what condition other than confiscation would a central bank be able to reduce the supply of gold in circulation? Once released it would remain in circulation unless it came back to the bank in the normal course of business. This is not the case with Federal Reserve money where they can add to and subtract from the money supply at will.

I don't accept the premise that gold would become so scarce as to not be a viable currency. Besides, mining is adding to the total supply at all times.

 

[stefan_777]

Quote from nevadan:

Under what condition other than confiscation would a central bank be able to reduce the supply of gold in circulation? Once released it would remain in circulation unless it came back to the bank in the normal course of business. This is not the case with Federal Reserve money where they can add to and subtract from the money supply at will.

If central banks were abolished their gold would be private and a monopoly. It would up in the air. If gold was for whatever reason deemed the only monetary means of exchange, all those central banks sitting on gold, who knows what they would do with it. Whoever imposed the ridiculous notion of gold as the only money would have to find a way to impose central banks to give up gold and distribute it in some foolish and naive way to the people, or else they would just remain a monopoly and become superpowers. But of course, central banks as superpowers wouldn't be acceptable to anarcho-capitalist Austrians.

I don't accept the premise that gold would become so scarce as to not be a viable currency. Besides, mining is adding to the total supply at all times.

Learn some geology, the earth takes millions of years to produce gold within it, we can mine it all out in decades. The same goes with oil.

So you do have to come to terms with the fact that gold is finite. And a finite currency will cause deflation when the population driven economy outgrows its finite currency.

 

[nevadan]

if central banks were abolished their gold be private and a monopoly.

so? All that gold is just gold in a vault until they spend (lend) it. Not sure what you point is.

Learn some geology, the earth takes millions of years to produce gold, we can mine it all out in decades. The same goes with oil.

So you do have to come to terms with the fact that gold is finite. And a finite currency will cause deflation when the population driven economy outgrows its finite currency.

Actually I have a degree in geology, thank you very much.

 

[stefan_777]

Quote from nevadan:
Actually I have a degree in geology, thank you very much.

Then you should know scarcity of resources more than any economist.

It should be obvious to you that gold can't be mined forever.

Anyway, it's not hard to see that metal or commodity currency is fundamentally flawed if we expect to keep having children and our economy to grow and prosper.

 

[nevadan]

Then you should know scarcity of resources more than any economist.

It should be obvious to you that gold can't be mined forever.

Anyway, it's not hard to see that metal or commodity currency is fundamentally flawed if we expect to keep having children and our economy to grow and prosper.

This is about as far as I care to go with this particular conversation. Just as a point of information here is a link to the gold supply in existence as of 1996. It was well over 100,000 tons then and higher today. I use it since it is the first link to come up on google.
http://www.fgmr.com/gold.htm

Also, until relatively recently a commodity of some sort has always been used as money, whether it was a metal, wampum, beaver pelts, tobacco, or even sticks with notches carved in them. It is just the relative scarcity of precious metals and their physical qualities that have placed them at the top of the list as a store of value over the centuries. So believe what you want about Federal Reserve Notes. They are becoming worth less by the day and will become worthless eventually.