Fixed Money Supply Full Gold Standards
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Yeah, then all the rednecks from Tennessee would become the newest of the "nuevo riche." That would be great. They will forgo the doubles, for the triple-wides, and buy those awful Escalade EXT pickups that look like they have built in mullets, just like their owners.
"Now that's livin!"
What it would be like: http://www.youtube.com/watch?v=k5zFiYHgftw
Deflation is the net result in any fixed-money system.
Production expands YOY, yet money to price that growing asset base remains fixed = deflation.
With deflating prices, comes deflating wages. No company will pay employees 50K a year when sales revenues decline 10%, YOY at fixed volume.
That said, deflation - nor inflation - is inherently destructive unless it occurs at extreme levels.
Monetarists fear-monger deflation because it means the end to their livelihood - fractional reserve lending. When in reality, some type of gold-standard would only mean the opposite of what we now have - savers benefit over borrowers, prices decline, wages decline. Most importantly, Government spending is severely restricted, imperial war-making grinds to a halt, and special interests no longer manipulate Congress because money cannot be freely printed and gifted away!! Government becomes constrained by its revenue, and the Nation is no longer sold for 30 Sheckles by the Judas Iscariot's in Washington.
Another criticism of deflationary systems is capital creation.
Under a hard-money standard, capital creation is displaced from banks to people, or the market. This is actually a good thing.
The way our system works now: the FED keeps rates low to allow cheap capital creation for the benefit of enterprise and banks. The cost - real inflation (not underreported BLS stuff) is high and hard-working Americans are robbed via inflation to subsidize low interest rates for Big Corporations and Banks.
In a hard-money system, fractional reserve banking no longer exists because gold cannot be printed. So where does capital formation come from? From the savings of average, everyday people.
This is actually how textbook Keynesian works: savers drive economic growth through level of savings that determines interest rates.
Anyway, this is a more ideal model because the aggregate decisions of many individuals (aka the Free Market) determine rates, not the FED, which is owned by Commercial Banks who distort interest rates for their own profit.
Critics then complain markets are a bad arbiter of value, and free market rates would succumb to herd behavior and generate worse boom-bust cycles then we have currently.
This is more baloney peddled by bankers to protect the status quo. In reality, its the extreme leverage in financial markets that creates volatility in prices. Some 95% of all futures contracts are cash settled. That means only 5% of volume is non-speculative. All markets are geared at similar levels and all that gearing originates from one place -- fractional reserve banking. Deposit 1 dollar which is leveraged 100 times to smash T-bill futures in a 200 point range!!
Under a hard-money system, no ridiculous leverage can be gamed hence volatility and wild fluctuations give way to slow, plodding, rational market movement.
As far as alternative money systems, gold isn't the best. Ideally, a currency that holds static value over time is best.
Some alternatives:
1) Precious metal-backed.
2) Commodity-backed (precious metals + grains + energy + agriculture and livestock etc).
3) FREE MARKET ALTERNATIVES - basically open up legal tender laws, and let the market innovate and invent the best solution. This should be instituted in addition to whatever money system we adopt next.
4) Neo-Colonial Script - the Founders created their own debt-free script to avoid tyrannical usury charged by england for use of her fiat money.
This system would be ideal. Basically, the Government creates sufficient debt-free money to meet its obligations AND ensure the easy, fair, and smooth flow of commerce.
The only problem with colonial script -- regulating its issuance so Government doesn't blow it out like the current fiat dollar.
Any system that isn't debt-backed, is a better system, tho.
The FED and its fractional reserve whores are a blight on this Country. The Framers fought to keep these guys out of America, and now they've got near total control. Their prescience was startling.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."
Thomas Jefferson.
Maybe the opposite interest of debtors and creditors should nullify each other, and the decision should be left to real economy?
Speaking of computers, they are one (maybe the only) sector where gains from innovations are spread between innovators, industry (profit becoming larger due to volume increase, even if unitary margin is razor thin) and consumers (thus the volume increase).
And that path needs huge investments (see past years Intel balance sheet, just to say one, look for cost of manufacturing facilities).
Can you say the same for other industries, where often a lower efficiency is rewarded by increasing prices? Anyone said colleges? Legal system? Distribution chain? Financial sector?
Moreover, if the deflation everyone speak of is only an adjustment toward the equilibrium? Is house bubble sustainable, when low-end houses cost 20 years of low-end disposable income? Should reckless be bailed out?
Should their ability to spend for goods and services (jobs!) dwindled to move a paper economy?
When economic system deviate from equilibrium in a direction, should moving again toward equilibrium stopped fearing backfire (ie another deviation opposite way)?
And, finally, where is the equilibrium range (what is stability range: the area inside which after a perturbation the system return to equilibrium without any external intervention)?
Well argumented, achilles...
I think the computer industry is amazing, it's just not in a perpetual state of deflation.
I never said economies shouldn't be able to adjust, as I think that it's an absolute necessity, it's just very unpleasant when the economy adjusts-down and deflates. I'm sure that any one can see this. Asset inflation (to an upper limiting value) is a key ingredient in the success of modern economies. We have based our entire system around appreciating prices. When prices do what we don't want them to (go down), our economic doctrine is set ablaze. It's just the way it is, I don't like it, but I cannot stop it.
If I knew the answer to this, I'd be a Nobel laureate, not an ET criminal; but a lack of external intervention tends to cause problems to be "sticky," so a lack of intervention would impede a timely drift back to equilibrium. Timely returns to equilibrium are not perfect, and cause some long run distortions; but a timely return keeps the economic pain to a minimum and our central bankers are only becoming more accomodative as time carries on. Once again, I see the flaws in this, and am not in total agreeance with accomodative policies that simply pacify the baby while increase the likelyhood that the baby will grow up to be a brat. It's just one of those things that's out of our hands. What do you do??
http://wiki.monticello.org/mediawiki/index.php/Private_Banks_(Quotation)
I have been wondering about that Jefferson quote seemed very modern in its phrasing seems its an urban legend.
I have been wondering about that Jefferson quote seemed very modern in its phrasing seems its an urban legend.
The first part (often quoted together), "banking establishments are more dangerous than standing armies" is surely by Thomas Jefferson, but in another context (deficit spending). It can be found here: http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php?title=1734&Itemid=27 using search (or see letter to John Taylor, May 28, 1816, last three lines).
The second part (that quoted by achilles) I wasn't able to find.
Interesting, the word "deflation" is listed on Merriam-Webster as born in 1891 (http://www.merriam-webster.com/dictionary/deflation), so its alleged use by Jefferson is at least suspect. Thank you for pointing it out.
First I would say LOGIC. But "logic" is something so illogical that wont get us anywhere. It seems that people have different perspectives of what logic is. There is more variety of logic than languages in the world.
In a perfect economic world, where true economic conditions increase, real prices DO decline. However, this is very different from "fixed money supply".
If you force deflation you end up doing the same as inflation...........even worse.......prices have some degree of inflexibility going down (due to psychology, order of things, or whatever you call it).
I WONT deny however that through a fixed money supply you end up in the long run having good results. HOWEVER, my point is that a price mechanism under a fixed money supply takes tooooooooooooooooooooooooooooooooooo long. We are better off trying to keep a constant purchasing power of money, some years we could go over by increasing the money supply to 0.5% or negative 0.5% but it (I BELIEVE) can provide a more efficient monetary system trough this practice.