What do you mean? Can you please explain?
Oh you and your silly assumptions.
First off, why would a free market currency have to be a metal?
Secondly, why wouldn’t there be enough gold, silver, and/or copper to fulfill the role as currency?
Thirdly, the part about requiring resources to mine and mint… isn’t that what you want?!? If a private coinage producer employs more resources in order to produce more money, not only is that private coinage producer providing monetary stimulus, but also fiscal stimulus (by hiring more workers, opening new mints, etc.).
Because I think you’re thinking about this in a problems and solutions kinda way. But this isn’t engineering we’re talking about where you turn a knob here and change a part there, you’re talking about people and public policies that have real consequences both intended and unintended. Instead of the “problem/solution” paradigm I think it’s better to use the “various different issues/ multiple solutions all involving different trade offs” paradigm. Looking at the situation with this paradigm, it becomes clear to me that there is no one problem and one solution but in fact many different paths we could take and they would all have a cost. You’re saying deflation is such an awful thing that any means to curb it would be justified by the ends. That’s a dangerous path imo.
America had tremendous amount of productive capacity in the 1930s. America was like China is today. A huge net exporter by far. Crash due to speculation in the financial markets did NOT one bit reduce America’s ability to create real goods and services. If you don’t believe this point please do some research.
Your scenario in broader terms did NOT happen during the great depression. Demand for everything collapsed.
It didn’t happen in the Great Depression because there was no free market in the 1930s, you silly goose you. The Federal Reserve controlled and mismanaged the nation’s supply of currency while Hoover, FDR, and their cronies made sure to keep wages and prices inflexible.
If we had a free market currency, then producers of private coinage would be very profitable during times of price deflation and would expand their production, thereby providing a free market fiscal and monetary stimulus at the same time. This stimulus would be much more calibrated than anything government can produce, as we often see government providing stimulus either too late or too early or providing a stimulus that is too large or too small.
The FED has kind of done this. They have printed up a lot of money since the Lehman collapse. But not much of that money has seaped to those who will end up spending it. Most of it has been hoarded by the banks. So yes, if money is put in the hands of the public who will circulate it more the problem will be solved. But I just have a different way of putting that money in the public’s hand: Do public projects!
Your way is not viable anymore since the amount of metal needed does not exist readily available and it is also very cumbersome to carry and count the metal coins in purchases and payment of bills. Not to mention the security risk of the metal getting stolen.
Mansoor
My point precisely. A free market currency provides a real alternative since any deflation automatically renders free market currency producers profitable. Thus, such producers would expand their production of currency providing a fiscal and monetary stimulus at the same time. This is only about the third time I’ve said this.
Sure it does. If metal is as scarce as you say it is, then each gram would simply have a much higher value. And why would a free market currency be made out of only one metal? Why would a free market currency have to be made of metal at all?
Which is why banks in the past have issued paper bills (certificates) in exchange for physical bullion. The paper then acted as currency, backed up by the bullion.
There is also security risk in getting dollar bills stolen. I don’t think anyone takes such minor transaction costs seriously.
You say no end in sight, but you alsy say that we should delay the end more and more by maintaining a mythical quasi-boom. If you drink too much, you will get a hangover, cause and consequence. But then you drink more to delay the hangover…you know that the situation isn’t sustainable and that the hangover potential will only acumulate.
Alcohol poisoning.
You are correct. But you can understand the problem if you look at things in aggregate (aggregate demand, aggregate investment activity on real projects, aggregate cash balances, aggregate labor hours employed, aggregate physical output created, aggregate unemployment, aggregate inflation, aggregate deflation, aggregate factory capacity and aggregate producivity increases).
All, these things tell the story: Too much savings and not enough demand! At least right now.
Then you come up ways to stimulate demand.
The real problem is that we really have only one major data point of proof that deflation can make a civilization go poof! And that was the great depression.
That is why people are not convinced. Maybe we need more data points (I dread that) .
Also, it has been pounded into our heads for a lifetime: save, save, save. When real message should be: Save and invest if investment opportunities exist otherwise better to spend. Don’t hoard. And if individuals don’t do it then the government must do. It is like fighting a war.
Mansoor
It’s not that I’m not convinced that deflation can be a threat, it’s that I don’t agree with any of the conclusions you seem to be coming to after that. I also disagree with how you would measure the results of your recommendations. Lastly, I disagree with the idea that government spending is somehow the same as private spending.
Hoarding conserves capital for the point at which it’ll be more valuable to others. If I stuff my mattress with dollar bills, I’m keeping the money because I believe it will have more value to me in the future (in terms of what I’ll be able to exchange it for) than it does at the present.
You still have yet to address my counter-example to your “deflation is horrible” mantra.
No. No. From this point on we must do things to discourage hoarding. Encourage people to spend and invest only when investment opportunities are available. Humans are becoming too productive too fast due to the use of information technology, best practices in business processes and modern ways of managing people.
We have to find projects to do. This is not just a USA problem. This is a global problem. The world economy is like a body. You must maintain the temperature within healthy levels. Too hot or too cold will both leads to disaster.
This project is not one time. We will have to continue to find things to do for people if the market does not (i.e., if deflation ensues). From now on this is how it will have to be.
Mansoor
I guess I can wait for an answer.
Mansoor hasn’t really answered much in this 90+ reply thread.
I’m sorry, but this assumption of thrift and aggregates meeting anywhere meaningful is idiotic. First, it assumes that aggregates are the only real thing that matters in economic activity. Second, it assumes the given aggregate measure is right without proof. So, I’m not going to bother debating this guy until he actually takes a moment to discuss the assumptions and why they’re valid and prove them so. Until then, the rest of his argument is a house of cards that can be pulled apart. I can point to one vector that proves this: productivity. If the traditional aggregate model of economies follows productivity should go down with investment and other vectors, but this current bust has a fluke: productivity has gone up. Why?
With no improvement:
Year 1 Year 2 Year 3 Year 4
Revenue $100 $95 $90 $85
Cost $100 $95 $90 $85
With improvement:
Year 1 Year 2 Year 3 Year 4
Revenue $100 $97 $95 $90
Cost $100 $95 $90 $85
Net gain due to improvement: Year 1 = $0, Year 2 = $2, Year 3 = $5, Year 4 = $5
If better service required an investment (say hiring a coaching consultant) for $100.
Now compare this to a inflationary environment:
With no improvement:
Year 1 Year 2 Year 3 Year 4
Revenue $100 $105 $110 $115
Cost $100 $105 $110 $115
With improvement:
Year 1 Year 2 Year 3 Year 4
Revenue $100 $108 $116 $124
Cost $100 $105 $110 $115
Net gain due to improvement: Year 1 = $0, Year 2 = $3, Year 3 = $6, Year 4 = $9
Notice that my payback time for the deflationary environment will be a much longer. This give rise a very strong incentive to hoard and raises the hurdle to invest very significantly. All investments are risky. And the longer I have to wait to get paid back the more risky it is!
Employees are working even harder because they fear losing their jobs.