[e-gold-list] Re: clear thinking

[John Kyle]

Pete Chown wrote:
> John Kyle wrote:
> 
>> Without fiat money, and the ability to create more, under a gold standard
>> government borrowing would push up interest rates.
> 
> It already does push up interest rates.  I suppose to be precise, the
> government can choose higher interest rates or inflation.  If they
> borrow through bonds, they bid up interest rates.  If they print money,
> they increase inflation.

It pushes up interest rates, but not at all as much as it would under a gold
standard.

To clarify, the US government Treasury creates bonds and borrows money, the
Federal Reserve central bank creates more money. Two distinct entities.

Right now, the FED creates a lot of new money every year. The way they get that
money into circulation is by buying US government bonds. If the FED was not
around to buy up those bonds with newly created money, then interest rates would
have to be significantly higher.


> 
>> However, the price of milk in 2005 is
>> the exact same in 1995. This is because the inflation created by the FED has
>> canceled out any decline in prices. But, since on the face of it the prices are
>> the same, the FED can claim there has been no inflation.
> 
> That's what inflation means, though: requiring more money to purchase
> the same goods.

As commonly used, yes. But I would say that requiring more money to purchase the
same goods is a -symptom- of inflation. What is happening is that the money
itself is being debased. It is being driven down in value because they are
increasing the supply. They are taking the fiat unit you hold, and decreasing
its value. With all else being equal, that would result in more money to
purchase the same goods.

But in my milk example, a falling price is masked by creating more money. If the
price of milk would have gone down 5%, and instead goes up 0.5%, I would feel
ripped off. Where did that extra wealth and value go? It goes to the government
and the banking system and Federal Reserve. Why did a gallon of milk once cost
$0.85 and now cost $3.00? Shouldn't with all the increased technology and other
efficiencies over the years, Milk cost maybe $0.70?

If the FED creates 7% more money in a year, and general prices only go up 3%, I
do not see that as any kind of victory.


> 
> I suppose there are two views about what money ought to represent.  The
> current view is that money stands for the goods it could buy, so we
> should try to keep prices constant.  The other is that money stands for
> the labour in producing the products, so we should try to keep the
> amount of labour constant.  In the second view, $1 would buy a certain
> amount of a farmer's time -- in both 1995 and 2005.  Presumably you
> would get more milk in 2005, because the farmer is more productive.

Money is just a unit. It stands for whatever the market wants it to stand for,
and the value in what it will buy is set by supply and demand of things in the
market. That is, if a body doesn't screw with the unit of account. If a body
screws with the unit of account, it is detrimental to money's function in
providing accurate prices.


> I suspect our choice of the first approach is pragmatic as much as
> anything.  Deflation is bad for the economy, so we try to avoid it.

I do not agree that deflation is bad for the economy. Greater economic
efficiency that results in lower prices to the consumer is not a bad thing. It
allows the average consumer to buy more and increase his wealth while having the
same income.

The only real case of deflation being bad is when it is not a market phenomenon.
If prices fall due to economic realities, that is all well and good. If prices
fall because for some reason the amount of money in existence shrinks a lot,
that can be bad.

It is much better to have gold as money, where the supply can not be
artificially controlled by a small group of people, and where prices -and
interest rates- reflect actual market realities.

Fractional reserve banking should also be eliminated so that gold can serve as
an accurate and stable money, fulfilling the role of money as a store of value,
medium of exchange, and unit of account.



- John




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