I was debating someone else. I am not interested in your straw mans and ad hominems.
Not at all. It just shows whatever existing quantity was not optimal.
I see no fallacy in pointing out your mistakes. Also, I don’t think you own the forum so why on earth do you think you can tell me to stfu ?
true
and as to your other comment, that was odd, but… thanks for taking the time to answer.
What the hell? If something gets more expensive relative to other things there is an incentive to increase its production. This is econ 101.
You are correct. If there is a shortage of bread and it takes more eggs to exchange for bread then new entrepreneurs will bring more bread to market because they can get more goods with more valuable bread. Eventually there will be sufficient supply of bread and the value of bread, compared to other goods, will be reduced.
When there is monetary inflation the price of all goods rise in the economy. Bread now costs $3 instead of $2. The real price of bread has not gone up. Only the dollar/money price has gone up. Before the inflation the eggs cost $2 per dozen and now they cost $3 per dozen. Even though we have inflation I still get the same number of bread in exchange for my eggs. Real prices (in terms of goods exchange) have not changed. Only dollar price has.
The inflation will create dollar price distortion in the economy. Those who receive the new money first will spend it in specific areas of the economy. Maybe the gov’t stimulates the building of bridges so the construction companies get the new money first. They spend it on steel and concrete. The prices of these commodities get bid up in the economy. There is no shortage of money because more money was created for this purchase. Therefore the price of other things in the economy do not fall. If there was a fixed amount of money then falling prices of other things would signal to entrepreneurs the significant demand for concrete and steel while other areas are in lower demand. Labor, land and capital would be reallocated from the now non-profitable entreprises to develop concrete and steel. Wealth in this case is redirected from producing less desirable things to more desirable (concrete, steel) things. In the former case, the steel and concrete were purchased with new money and resulted in higher prices of concrete and steel. There is less reallocation of wealth and production in the economy because people still have sufficient money to demand other things along with the new increase demand for concrete and steel. But the problem is that the real free market did not have true demand for more concrete or steel (for bridges) because if it did then the gov’t wouldn’t have to create money to stimulate it. This is false demand created by gov’t. It is a distortion in the economy. It relates to the Austrian Business cycle theory. The new bridge was created using concrete and steel that would have been better used for other things the economy desired. Maybe houses. Maybe more cars. Other enterprises had to pay higher prices for concrete and steel to build these other consumer goods while the bridge makers could afford the higher prices. The consumers in the economy can’t afford the more expensive houses or cars because of the distortion on the economy. Only the construction guys that got paid with the new money, and got pay raises with it, can afford the more expensive houses & cars. The distortion in the economy continues. Eventually the distorted economy ends in an inflationary bust.
The idea that gov’t can gradually add sufficient money to the money supply to keep prices fixed during times of increased productivity and increased quantity of goods is a pipe dream. Monetary prices are a lagging indicator in the economy. You introduce the new money (as credit) and then you wait to see the price change, months down the road. The Fed can’t regulate prices tight enought to prevent inflation. They never could. The dollar now buys what 5 cents would buy in 1913 when the Fed was created. Also, the Fed is just an arm of the federal gov’t and is used as a tool by gov’t to control the money supply. This manipulates the economy for political purposes. It also creates money for off-budget things like paying for war. The gov’t uses the Fed to create money to serve the gov’ts interest. In doing this it creates price inflation, stealing wealth from the citizens who have savings or fixed incomes or are last to get pay raises along the chain of price inflation.
Thanks everyone for your posts and insight, I think this has given me a much better grasp of this issue. Though I certainly hope to see the discussion continue, of course. [8-|]
Now, after that you brought the government in the picture. But if the above is true then the state only has an auxiliary role in business cycles as monetary inflation is inherent in a market economy. By the way were the business cycles caused by the gold rushes?
Monetary inflation is not inherent in a market economy. It is inherent in today’s economy because since 1933 we’ve domestically been off the gold standard, and since 1971 dropped it as a means of international trade payment. During this time the gov’t has had a monopoly on the creation of money and credit to create monetary and price inflation. In a true free market there is no fiat money. Only commodities that people work & produce in exchange for other commodities. Money happens to be a commodity that one trades his labor for in order to trade it again for other goods. Just like a glut in wheat causes the exchange value of wheat to be less, a glut in dollars causes the exchange value of dollars to go down. The problem is that dollars are the unit of account for profitability in an economy. A glut in dollars makes producers falsely believe their products are worth more, but really they’re only worth more in units of dollars and not necessarily other goods. It’s a false signal to produce more due to false expectation of future profitability. It creates economic distortion when you inflate the money supply. Since 1971 we have created enormus economic distortion on a global scale due to inflationary US monetary policy, which spread around the world because our trade partners use their accumulation of US dollars (due to trade imbalances caused by lack of a gold standard) as their base reserve to expand and inflate their own money supplies. This creates world wide inflation (ie: USA exports its inflation) and world wide economic distortions.
To my knowledge, businesses cycles were not caused by the gold rushes. Back in the day, with increasing amounts of gold coming to market, it was probably considered inflationary for what they were used to at the time. But the inflation was nothing like it is today. To produce gold takes investment and labor and therefore increase in gold money supply is not rapid compared to day’s standard where key board entry can easily add a zero by the press of a button. On a gold standard the economy typically has stable boom periods. There’s only a couple brief short periods in history where we had a true free market gold standard. One was from 1840’s to 1860’s where Pres Andrew Jackson got rid of the central banking system and brought back the classical gold standard and free market banking. To my knowledge there was no real business cycles within that period. It ended in the 1860’s because of the civil war. Then there’s the period of 1890 (after panic of 1893?) , for a few years, where the gold standard was reinstated in tandem with a national banking system (who had a monopoly to create money) that simultaneously inflated the money supply. National bank credit creation and Inflation was used to fund canals and railroads during this time, which ended in an inflationary bust in 1897.
So it’s a little hard to say if a gold standard is responsible for business cycles. The only true free market gold standard was during Jackson for about 15-20 years leading up to the civil war. For most other American gold standard periods we had some form of central banking system that had monopoly to create a pyramid of money on top of gold reserves. Central banking and monopoly on paper money creation existed during: The first bank of the USA for 20 years following 1791, the second bank of the US for 20 years following 1816 and then the national banking system from the 1860’s up until 1900’s. We had boom/bust cycles during the periods with these banking systems because these banks could create credit out of thin air. Having said that, credit creation was much more restricted than today because there still were risk of bankrupcy and bank runs. The inflation and instability created by these banks created the boom/bust and these risks are why JP Morgan and Rockerfellers agitated their political buddies for the Federal Reserve in the early 1900’s. The Fed was supposed to end all panics and recessions/depressions in the future. It has only made them worst.
Any free market will have entrepreneurs that make bad business decisions. These businesses will fail and have to be liquidated in a bust. This is not a business cycle. When you have most all businesses in the economy simultaneously making bad entrepreneural decisions due to false economic signals created by inflation - will you get a fake boom followed by a corrective bust.
yeap bearing01 big, big difference between gold/silver money and fiat currency.