Gold Over $800 Per Ounce

Off Topic Politics & World Issues
141

“The Mystery of Banking” Murray N. Rothbard, Chapter 4 – The Supply of Money

[i]
What should the supply of money be? What is the “optimal” supply of money? Should M increase, decrease, or remain constant, and why?

This may strike you as a curious question, even though economists discuss it all the time. After all, economists would never ask the question: What should the supply of biscuits, or shoes, or titanium, be? On the free market, businessmen invest in and produce supplies in whatever ways they can best satisfy the demands of the consumers. All products and resources are scarce, and no outsider, including economists, can know a priori what products should be worked on by the scarce labor, savings, and energy in society. All this is best left to the profit-and-loss motive of earning money and avoiding losses in the service of consumers. So if economists are willing to leave the “problem” of the “optimal supply of shoes” to the free market, why not do the same for the optimal supply of money?

In a sense, this might answer the question and dispose of the entire argument. But it is true that money is different. For while money, as we have seen, was an indispensable discovery of civilization, it does not in the least follow that the more money the better.

Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better.

But money is uniquely different for money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another. Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.[/i]

142

[quote]LIFTICVSMAXIMVS wrote:
Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…The size of the pie doesn’t matter; what matters is that the ratio of weight in gold to the dollar does not grow or shrink once the standard is set. …

This is incorrect. If/when the economy grows and the supply of money does not then there can be trouble.

It can lead to deflation. This is bad for lenders because people will default on loans.

The gold standard would be fine if population, technology and productivity never grew.

Why?[/quote]

Because you are limiting the supply of money. As the economy grows it will need a larger supply of money to make transactions.

This can be done by printing more fiat money or devaluing gold if on a gold standard. Of course if you do this then what is the point of the gold standard?

If it is not done then either the economy will be stifled or people will have to barter to get around the lack of money availability or prices will have to deflate.

Across the board deflation is not a good thing. It can lead to people defaulting on loans, why pay your mortgage or car payment when it is losing value? Just walk away!

143

[quote]LIFTICVSMAXIMVS wrote:
“The Mystery of Banking” Murray N. Rothbard, Chapter 4 – The Supply of Money

[i]
What should the supply of money be? What is the “optimal” supply of money? Should M increase, decrease, or remain constant, and why?

This may strike you as a curious question, even though economists discuss it all the time. After all, economists would never ask the question: What should the supply of biscuits, or shoes, or titanium, be? On the free market, businessmen invest in and produce supplies in whatever ways they can best satisfy the demands of the consumers. All products and resources are scarce, and no outsider, including economists, can know a priori what products should be worked on by the scarce labor, savings, and energy in society. All this is best left to the profit-and-loss motive of earning money and avoiding losses in the service of consumers. So if economists are willing to leave the “problem” of the “optimal supply of shoes” to the free market, why not do the same for the optimal supply of money?

In a sense, this might answer the question and dispose of the entire argument. But it is true that money is different. For while money, as we have seen, was an indispensable discovery of civilization, it does not in the least follow that the more money the better.

Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better.

But money is uniquely different for money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another. Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.[/i][/quote]

Hogwash. He ignores the very real effect of money scarcity and deflation.

I am not sure why you take these guys seriously.

144

[quote]Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…The size of the pie doesn’t matter; what matters is that the ratio of weight in gold to the dollar does not grow or shrink once the standard is set. …

This is incorrect. If/when the economy grows and the supply of money does not then there can be trouble.

It can lead to deflation. This is bad for lenders because people will default on loans.

The gold standard would be fine if population, technology and productivity never grew.

Why?

Because you are limiting the supply of money. As the economy grows it will need a larger supply of money to make transactions.

This can be done by printing more fiat money or devaluing gold if on a gold standard. Of course if you do this then what is the point of the gold standard?

If it is not done then either the economy will be stifled or people will have to barter to get around the lack of money availability or prices will have to deflate.

Across the board deflation is not a good thing. It can lead to people defaulting on loans, why pay your mortgage or car payment when it is losing value? Just walk away![/quote]

But doesn’t the supply and demand for money set the prices just like the supply and demand for consumer and capital goods? If there “isn’t enough money” prices will drop until there is. Money is only an exchange medium. There is no optimal supply.

145

[quote]Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
“The Mystery of Banking” Murray N. Rothbard, Chapter 4 – The Supply of Money

[i]
What should the supply of money be? What is the “optimal” supply of money? Should M increase, decrease, or remain constant, and why?

This may strike you as a curious question, even though economists discuss it all the time. After all, economists would never ask the question: What should the supply of biscuits, or shoes, or titanium, be? On the free market, businessmen invest in and produce supplies in whatever ways they can best satisfy the demands of the consumers. All products and resources are scarce, and no outsider, including economists, can know a priori what products should be worked on by the scarce labor, savings, and energy in society. All this is best left to the profit-and-loss motive of earning money and avoiding losses in the service of consumers. So if economists are willing to leave the “problem” of the “optimal supply of shoes” to the free market, why not do the same for the optimal supply of money?

In a sense, this might answer the question and dispose of the entire argument. But it is true that money is different. For while money, as we have seen, was an indispensable discovery of civilization, it does not in the least follow that the more money the better.

Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better.

But money is uniquely different for money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another. Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.[/i]

Hogwash. He ignores the very real effect of money scarcity and deflation.

I am not sure why you take these guys seriously.[/quote]

Please define deflation and why you think it is a bad thing.

146

This is taken from the same book, same chapter as above just further down the page:

[i]To show why an increase in the money supply confers no social benefits, let us picture to ourselves what I call the “Angel Gabriel” model. The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled.

What will be the reaction? Everyone knows it will be instant hoopla and joyous bewilderment. Every person will consider that he is now twice as well off, since his money stock has doubled. In terms of our Figure 3.4, everyone’s cash balance, and therefore total M, has doubled to $200 billion. Everyone rushes out to spend their new surplus cash balances. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise. Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately double, and people will find that they are not really any better off than they were before. Their cash balances have doubled, but so have prices, and so their purchasing power remains the same. Because he knew no economics, the Angel Gabriel’s gift to mankind has turned to ashes.

But let us note something important for our later analysis of the real world processes of inflation and monetary expansion. It is not true that no one is better off from the Angel Gabriel’s doubling of the supply of money. Those lucky folks who rushed out the next morning, just as the stores were opening, managed to spend their increased cash before prices had a chance to rise; they certainly benefited. Those people, on the other hand, who decided to wait a few days or weeks before they spent their money, lost by the deal, for they found that their buying prices rose before they had the chance to spend the increased amounts of money. In short, society did not gain overall, but the early spenders benefited at the expense of the late spenders. The profligate gained at the expense of the cautious and thrifty: another joke at the expense of the good Angel.

The fact that every supply of M is equally optimal has some startling implications. First, it means that no one – whether government official or economist – need concern himself with the money supply or worry about its optimal amount. Like shoes, butter, or hi-fi sets, the supply of money can readily be left to the marketplace. There is no need to have the government as an allegedly benevolent Uncle, standing ready to pump in more money for allegedly beneficial economic purposes. The market is perfectly able to decide on its own money supply.

But isn’t it necessary, one might ask, to make sure that more money is supplied in order to “keep up” with population growth? Bluntly, the answer is No. There is no need to provide every citizen with some per capita quota of money, at birth or at any other time. If M remains the same, and population increases, then presumably this would increase the demand for cash balances, and the increased D would, as we have seen in Figure 3.6, simply lead to a new equilibrium of lower prices, where the existing M could satisfy the increased demand because real cash balances would be higher. Falling prices would respond to increased demand and thereby keep the monetary functions of the cash balance-exchange at its optimum. There is no need for government to intervene in money and prices because of changing population or for any other reason. The “problem” of the proper supply of money is not a problem at all.[/i]

147

[quote]LIFTICVSMAXIMVS wrote:
…
Please define deflation and why you think it is a bad thing.

[/quote]

Today your house is worth $ 200,000. Next year it is worth $ 150,000. Five years from now it is worth $ 100,000. You would be a fool to keep paying $ 200,000 mortgage for a $ 100,000 house.

It is an extreme illustration but even if home values were slowly declining long term, which they would have to do if the economy was growing and the money supply was not then people would be very resistant to buying homes or any other items that required long term financing.

This would tend to slow an economy. You may think that is great and self regulating but that really means people are out of work and cannot afford things.

So basically if you want to set a certain level of economic development then fixing a gold standard would do that. I am surprised Al Gore has not gotten on board with this. It is probably the best way to slow worldwide economic development, thus “saving the planet”.

In order to keep the economy humming and people employed a slow growth in the money supply and slow inflation works best.

And it fits perfectly with the fact that trying to stockpile money (material and labor) is subject to entropy.

Money cannot be a magical medium. There is a price to pay for sitting on money and not reinvesting it. The price is not keeping up with those that do reinvest their money.

148

[quote]LIFTICVSMAXIMVS wrote:
This is taken from the same book, same chapter as above just further down the page:

To show why an increase in the money supply confers no social benefits, let us picture to ourselves what I call the “Angel Gabriel” model. The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled.
…[/quote]

Total strawman. No one is proposing hyper-inflation as a viable model.

149

[quote]Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…
Please define deflation and why you think it is a bad thing.

Today your house is worth $ 200,000. Next year it is worth $ 150,000. Five years from now it is worth $ 100,000. You would be a fool to keep paying $ 200,000 mortgage for a $ 100,000 house.

It is an extreme illustration but even if home values were slowly declining long term, which they would have to do if the economy was growing and the money supply was not then people would be very resistant to buying homes or any other items that required long term financing.

This would tend to slow an economy. You may think that is great and self regulating but that really means people are out of work and cannot afford things.

So basically if you want to set a certain level of economic development then fixing a gold standard would do that. I am surprised Al Gore has not gotten on board with this. It is probably the best way to slow worldwide economic development, thus “saving the planet”.

In order to keep the economy humming and people employed a slow growth in the money supply and slow inflation works best.

And it fits perfectly with the fact that trying to stockpile money (material and labor) is subject to entropy.

Money cannot be a magical medium. There is a price to pay for sitting on money and not reinvesting it. The price is not keeping up with those that do reinvest their money.

[/quote]
Zap, you are only looking at it from one perspective. Prices cannot fall indefinitely because any significant decrease in price will increase demand. If the price of homes were reduced by 50% you would see a doubling in demand and that would raise prices again.

Incidentally, because the fed lowered the rates they created artificial demand for housing which raised the price of homes. Then, when investors got angry at the slowdown due to higher prices they raised rates which angered sellers only and slowed the housing market even more; and it had the additional benefit of increasing mortgage rates and thus finally popping the housing bubble.

No one “sits” on money. We invest it (save) and use it to increase productivity or we spend it on ourselves – it serves no other purpose. What you are referring to is nonsensical and not realistic. Who do you know that has ever “sat” on money?

You are confusing the idea of lowering prices with decreased productivity. Decreased productivity comes from higher prices not the other way around. If it costs more to produce there will be deflation. Productivity is all that matters for the economy.

150

[quote]Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…The size of the pie doesn’t matter; what matters is that the ratio of weight in gold to the dollar does not grow or shrink once the standard is set. …

This is incorrect. If/when the economy grows and the supply of money does not then there can be trouble.

It can lead to deflation. This is bad for lenders because people will default on loans.

The gold standard would be fine if population, technology and productivity never grew.[/quote]

The United States became the greatest economic power on earth between 1865 and 1913, all under a gold standard. Of course, we had depressions in there, mostly because government was changing and the wealthy/powerful could use the government as a club against rivals.

151

[quote]Zap Branigan wrote:
Total strawman. No one is proposing hyper-inflation as a viable model. [/quote]

The causes and effects are the same…it was an example only – not to be taken literally. And while we are talking about strawmen, would you call a 20x increase in price inflation, hyper-inflation, or hyper-hyper-inflation…?

152

[quote]Headhunter wrote:
Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…The size of the pie doesn’t matter; what matters is that the ratio of weight in gold to the dollar does not grow or shrink once the standard is set. …

This is incorrect. If/when the economy grows and the supply of money does not then there can be trouble.

It can lead to deflation. This is bad for lenders because people will default on loans.

The gold standard would be fine if population, technology and productivity never grew.

The United States became the greatest economic power on earth between 1865 and 1913, all under a gold standard. Of course, we had depressions in there, mostly because government was changing and the wealthy/powerful could use the government as a club against rivals.

[/quote]

Because we started completely undeveloped and we increased our gold production. Now that gold is much more of a fixed asset and we are far more developed with a far larger economy it is a different story.

At best the gold standard would have little effect. At worst it would stifle the economy.

153

[quote]LIFTICVSMAXIMVS wrote:

Zap, you are only looking at it from one perspective. Prices cannot fall indefinitely because any significant decrease in price will increase demand. If the price of homes were reduced by 50% you would see a doubling in demand and that would raise prices again.

[/quote]

Of course, but scarcity of money would make that a downward trend. It is currently an upward trend.

It would also lead jobs on a downward trend.

The Fed made a mistake but the larger mistake was made by borrowers and lenders. A gold standard would allow borrowers and lenders to make poor loans. What it might prevent is the Fed trying to tweak supply of the money so the eventual crash would not be catastrohic. Like the Great Depression.

Plenty of people sit on money. Do you have any in your wallet? In your bank account? All money is not instantly spent!

[quote]

You are confusing the idea of lowering prices with decreased productivity. Decreased productivity comes from higher prices not the other way around. If it costs more to produce there will be deflation. Productivity is all that matters for the economy.[/quote]

I have no confusion on the matter.

154

[quote]Zap Branigan wrote:
Of course, but scarcity of money would make that a downward trend. It is currently an upward trend.

It would also lead jobs on a downward trend.
[/quote]
You are looking at this too simplistically.

Which jobs are affected when when? Not every industry is affected at the same time. Costs affect different industries differently. For example, in the housing industry, a high demand for homes increases the cost of building supplies – timber, brick, etc. Do you think this affects the auto industry and the cost for steel right away?

Money is not a resource like timber. It is only used to exchange goods indirectly. You may lack the necessary finances to afford what you need but overall the amount of money in the system is irrelevant because you can always borrow what you need if other people save. If no one saves it causes inflation because banks lend more than they keep on hand (fractional reserve banking).

The economy does not grow – it is what it is. Production grows or declines based on supply and demand which has nothing to do with the money supply. Lower prices do not mean a loss verses a profit. It means higher productivity which means more overall wealth. That is what is meant by “growing the economy”. It has absolutely zilch to do with the money supply.

155

[quote]LIFTICVSMAXIMVS wrote:
Zap Branigan wrote:
Of course, but scarcity of money would make that a downward trend. It is currently an upward trend.

It would also lead jobs on a downward trend.

You are looking at this too simplistically.

Which jobs are affected when when? Not every industry is affected at the same time. Costs affect different industries differently. For example, in the housing industry, a high demand for homes increases the cost of building supplies – timber, brick, etc. Do you think this affects the auto industry and the cost for steel right away?

Money is not a resource like timber. It is only used to exchange goods indirectly. You may lack the necessary finances to afford what you need but overall the amount of money in the system is irrelevant because you can always borrow what you need if other people save. If no one saves it causes inflation because banks lend more than they keep on hand (fractional reserve banking).

The economy does not grow – it is what it is. Production grows or declines based on supply and demand which has nothing to do with the money supply. Lower prices do not mean a loss verses a profit. It means higher productivity which means more overall wealth. That is what is meant by “growing the economy”. It has absolutely zilch to do with the money supply.[/quote]

You need to reread the link I posted earlier fom the Cal Berkely professor.

156

[quote]Zap Branigan wrote:
You need to reread the link I posted earlier fom the Cal Berkely professor.[/quote]

I actually did read it – it has been taken down since then.

The fallacy of his argument rest with the fact that he neglects the question of what stimulates productivity. Productivity (more goods at less cost) is all that matters to grow wealth (the economy).

How does the increasing the supply of money grow productivity if the end result is always higher costs to the producers and a decline in demand from the consumers?

A gold standard does not limit credit. In fact, even in a free market, banks would still make their profits from credit but they will suffer if they make bad investments.

157

[quote]LIFTICVSMAXIMVS wrote:
…
How does the increasing the supply of money grow productivity if the end result is always higher costs to the producers and a decline in demand from the consumers?

…[/quote]

It doesn’t. I am not sure why you are making this point.

158

NEW YORK (AP) �?? Commodities prices skidded Monday as a strengthening U.S. dollar at least temporarily halted a nearly three-month rally in gold, oil and other raw materials. Gold fell below $800 an ounce.

Gold prices slid in the largest one-day decline since the rally began in mid-August. Many analysts have been calling for a serious correction to gold prices, after the metal piled on nearly $200 an ounce in three months to rise to its highest level since 1980. Falling precious metals prices were accompanied by a rebounding U.S. dollar and sharply lower oil prices.

http://ap.google.com/article/ALeqM5jND4r3B-VBZu2Ogg2_yzjYnPIP8gD8SS8JEO0

159

[quote]Zap Branigan wrote:
It doesn’t. I am not sure why you are making this point.
[/quote]
Before, you asserted that “the economy can only grow if the money supply allows it to”, to paraphrase. It is this misunderstanding of terms that is confusing you and convoluting the argument. The economy does not grow or shrink – productivity does.

Productivity is influenced by cost – period. When costs rise productivity goes down. Since devaluation of currency raises costs how can it make us more productive?

Remember our discussion about being stranded on a deserted island? If you have all the resources and time to meet your basic needs but you also have additional resources and time left over after meeting basic needs so that you can improve your quality of life then you are, in fact, growing your wealth – becoming more productive.

What does this have to do with money? It doesn’t have anything to do with how much money there is. Money is only an exchange mechanism that allows you to trade indirectly so that you do not have to be self-sufficient.

160

[quote]LIFTICVSMAXIMVS wrote:
Zap Branigan wrote:
It doesn’t. I am not sure why you are making this point.

Before, you asserted that “the economy can only grow if the money supply allows it to”, to paraphrase. It is this misunderstanding of terms that is confusing you and convoluting the argument. The economy does not grow or shrink – productivity does. …[/quote]

As do markets. As does spending. This is a circular chicken and egg argument.