According to your logic, yes it will,
Actually, it’s not my logic. It’s Ludwig von Mises’ logic. I’m just trying to understand it. As from what I can tell, in your example, you would have neither deflation nor inflation because the real value of all aggregate transactions in the economy would also decrease so the equation would balance.
The opposite of inflation. If the money supply grows too fast then you have a decrease in that money’s purchasing power. If the money supply doesn’t grow fast enough you get deflation…an increase in that money’s value.
That I understand…it’s pure supply/demand economics. I don’t understand what the flaw is in the monetarist theory.
It’s Ludwigh von Mises’ logic!? context please. What equation are you trying to balance? In my example, you will have deflation according to both the money supply definition and prices definition. The money supply has shrunk by half (monetary deflation) and prices will obviously decrease by half (price deflation).
The critique is of the mechanistic quantity theory of money. Here is Jesús Huerta de Soto on the topic.
“The Essential von Mises” by Rothbard. He agreed with classical “quantity theory”.
The equation I am talking about is the equation of exchange: M * V = P * T
Where M is the total money in circulation, V is the velocity of money, P is the price level of all economic transactions, and T is the real value of aggregate transactions.
So you are saying that you never need to inject new specie into a gold-backed economy that is 100% reserve?
Thanks for the link. I read that page and couldn’t make heads-nor-tails of his argument. I’m printing out the whole PDF now so maybe some light reading tonight and a few glasses of wine will help it all sink in.
Jonas, from “The Essential von Mises”:
"The mechanistic Fisherine view of automatic relations between the quantity of money and the price level, of “velocities of circulation” and “equations of exchange” was explicitly demolished by Mises on behalf of an integrated application of the marginal utility theory to the supply and demand for money itself. " ######################### You seem to be really confused about what Mises is saying. In fact, you seem to have unerstood it exactly backwards. read that part again.
How does the money supply not increasing cause deflation?
So the only way for any investments to take place is to increase the money supply?
Could you not borrow money from others in the finite money supply?There would be people with money willing to lend, they don’t need to make more.
I don’t understand why you think investments can only take place when money (not wealth) is increased in supply.
The only difference between a finite commodity money supply and a fiat money system, is that there is no inflation (except the small amount from mining).
Fine. So money can increase in value. I still don’t see what’s the problem with that increase in value. And I do see a problem if some people get the ‘privilege’ to create money out of thin air (aka counterfeiting).
As you note, if there’s ‘less’ money then it becomes more valuable and prices go down. Why is that bad ?
I’m not sure that I could in any effort think of a dumber statement to make. “Economic output” decreases whilst “wealth” increases, whereas economic output is wealth.
Jonas,
These three videos may help you gain a better understanding, but you’re on the right path. The gold standard was a farce since the USA never practiced it and if there would have ever been enough gold to create a good general medium of exchange then people would have never borrowed from the goldsmith in the first place because of a shortage of money.
http://www.youtube.com/watch?v=9E0UPBtmTb0
http://www.youtube.com/watch?v=Y9FWECWWN5o
http://www.youtube.com/watch?v=aM7D3mnUSI0
I’ve read Byron Dale’s new book to, and it’s the single best peice of monetary literature ever written. No flawed theory, just facts.
There is no need for money supply to grow in order to pay interest. Money is constantly changing hands. When you provide some product or service to the market, you receive money. Which you can use to pay back the debt and interest.
I borrow 100$ from you at 10%. Let us imagine I’m a barber. I buy some stuff I need to work. You come every month to my barber shop and pay me 10$ for a haircut. At the end of the year, I’ll have 120$, 110$ to pay you my debt with interest and 10$ extra for me.
We don’t actually borrow money, we borrow goods and services we need to improve our work and to increase output. From that increased output interest is payed back.
Never heard of B. Dale but after watching the first video, I’m not impressed, to say the least. The guy has the reasoning ability of a 6 year old.
Z.
In a 100% reserve system, profits, interest etc. all derive from existing reserves; profit most notably being a relative phenomenon (IE, if the entire economy becomes equally more productive with the same distribution of resources then the profits of all firms will remain exactly the same). This is why the notion of a ‘declining rate of profit’ is spurious, simply because profit is not some extraneous factor, it is relative to various other outlays of productive resources actually in use. There is simply no way to predict or reasonably guess at what ‘average’, much less specific, profit rates will be in any given future state.
Jane agrees, and they agree to a pay-by date, and Jane wants 10g of gold as payment for the loan.
How did Joe agree to an impossible method of payment? They both know there is no gold to be gotten. So we must conclude that either Joe knows he can work for someone and get paid off in 10g of gold [or make money some other way] and thus be able to give jane her interest, or else, if he suspected people would be hoarding their gold and he would not be able to get any in time to pay off Jane, he would stipulate that he be able to pay the interest in some agreed upon thing that is worth 10g of gold.
Now where does this extra 10g of gold come from in a 100% reserve system?
It drops down from the moon. Just kidding. It isn’t needed, as explained above.
But that 10g has to come from somewhere, right?
It has to come into Joe’s posession, yes. And he gets it by working for someone for 10g of gold, or making money some other way. And if everyone is hoarding gold etc., as above.
Doesn’t more gold have to keep coming into the system to handle things like profit, interest, etc?
No. I make a profit by selling something for more gold than I paid for it.
I get interest by lending my gold to someone in exchange for getting a bit more of it in return eventually, as in above example.
Am I missing some important variable that would help explain this system?
You might be missing a good reading of What Has Govt Done to Our Money by Rothbard, where he discusses in a few pages how an economy runs under a gold standard.
What extra 10g of gold?
Imagine I work and have salary of let say 100g per month. You have 100g of gold and I borrow it at 10% interest. I buy new TV set and some other stuff. Every month I take 10g from my salary and give it to you. In 11 months I’ll pay back the debt and the interest (110g of gold). Now, what extra 10g of gold required are you talking about?
This can be a bit like trying to follow the ball under the cup. Its easy to get lost. I did this to try and help clarify the idea in my own head. Hopefully this is reasonablely correct. Let me know if I missed something.
Borrowers + Banks + Lenders + Everyone Else = “Society”
Break society out into the concerned groups. The people who have money to lend(Lenders), those who need the money(Borrowers), the ones who facilitate the trade(banks), and everyone else.
<500@1%<
<500g@2%<
Purchase 500g of goods and services from Everyone Else>>>>>>>
<<<<<<<<<Sell 530g of goods and services to Everyone Else<<<<<<<<<<
Repay loan 510g>
Pay Deposits 505g>
Payroll, Dividends, Expenses 5g>>>>
That resembles the spreadsheet I made before, and have shared a few times here and in other places. Here it is once again:
http://spreadsheets.google.com/ccc?key=0Ak0d51fpM-tocDdqU2ZOZWxtN0ZESjQ3ZWsxRHZ4RVE&hl=en
Your example seems a little bit simpler than mine (I think mine has a few too many unnecessary details). Perhaps I’ll modify mine sometime, or you could even make your own google spreadsheet for easy sharing.
Yea wanted to do it in a spreadsheet but didnt know how to get it on the forum. Didnt want to get too complicated or I might confuse myself.
That’s an excellent answer, thank you. I agree that it seems like chasing the ball (or maybe chasing the dragon!) but that spreadsheet sums it up nicely.
My only question is that at step5, while the “borrowers” have 500g to purchase goods and services from “everyone else” the “lenders” have nothing. What if they need to purchase goods and services before the money is paid back? Maybe show them only lending 400g…or would that complicate your sheet too much?
And my other point…can this cycle continue ad infinitum? Can you really have a society where the money supply never increases?