solarbird | (Reply)

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lulz gold standard

Okay, so. I am not a gold bug. I think it's stupid. I note that the credit cycle existed just as strongly when economies actually were on a gold standard and that accordingly, trying to stabilise (or even moderate) the credit cycle by going onto a gold standard is clearly not going to work. I note that the late Roman Empire was still in theory on a gold standard and its currency inflated right the fuck out of existence anyway.

But all that said, here's the case for the gold standard, such as it is:

There is a thing called money supply. It's the amount of money - cash in one form or another, be it bills, coins, electronic notation, etc. - available to the economy. It functionally includes available credit; this is very important. From an Austrian school of economics standpoint, inflation refers not to price increases, but increases in the supply of money; deflation, the opposite. Inflation is also correlated to increases in prices (which we'll call "price inflation") and vise-versa.

So note these terms:

inflation (or monetary inflation): increase in the supply of money
price inflation: cost of goods rising
deflation (or monetary deflation): decreases in the supply of money
price deflation: cost of goods falling

The method by which monetary inflation leads to price inflation is basically that of supply and demand; if the supply of money rises without a corresponding rise in the availability of things to do with that money, that money becomes of lesser value compared to the things you can do with it; people demand more of that money in exchange for those things.

There also exists a thing called the credit cycle. In a credit-supporting economy, such as ours, one method of creating "money" (and/or money-like instruments) is the issuance of credit with interest. This creates monetary inflation, which if not matched by an increase in actual production of goods and services (things you can do with it), results in price inflation. At certain levels of money supply, increases in money supply result in the enabling of the creation of more goods and services than new money; the value of the money in question actually goes up through the creation of more money, as opportunities to do things expand when more money is injected into the system. People with value-creating ideas are able to act upon those ideas where they couldn't without that injection of money; loans are paid off, with interest; the economy grows.

This creates incentives for money lenders to lend more money, which creates what's referred to as a virtuous cycle; the more you do something, the better off everybody gets, so you do more of it.

The problem is that as time goes on and the overall supply of money and people available to lend it grows, discretion declines, and the real economic return declines relative to the amount of new money created. So whereas, say, on average, lending $10 with $1 in interest would enable the creation of, say, $4 in new actual economic output, the average declines; over time, on average, you only get $3 in actual gain. Then more time goes on, and it's $2. Then $1. Then less than $1.

Now you're creating less in new economy than you're creating in new money. This does not mean you're not paying back the loan! You are! But the value of that money declines, and so you will start to see price inflation. But there's still incentive to keep lending, because the lenders are still getting the interest paid back, and also, people's perceptions lag badly behind reality.

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