I am not advocating this position, but I would like to hear your thoughts on GDP as Backing for Currency for the US and for other other countries. I ran into a Cato Economist. He aborred the Gold Standard, and suggested that GDP would be the ideal solution for currency backing. I have never heard that arguement before, so I was not preparred to counter that position. The only thing I could think of at the time was that GDP itself is not a reliable calculation, because of the the plethora of outstanding variables. Suggestions against or perhaps even praise for GDP as a backing?
Money is already backed by gdp. The difference between the money supply and gdp is inflation, as shown in the basic version of the quantity theory of money (QTM):
MV=PY. where V is held constant.
It is a reliable measurement, but not an accurate one. GDP is a “rough” estimate of the “well=being” of an economy.
GDP = consumption + gross investment + government spending + (exports − imports)
So the more people + government + dog spend the more money is printed?
Where’s the natural limit to this model?
I know in the Keynesian model the government deficit spending leads to an eventual balance at a higher level (in theory at least) but with this model the government spending would allow them to produce more money to spend without having to eventually pay it off from taxes in devalued money. They could pay off the debt with the new money or, a more likely scenario, would just print up the money as they spend it in anticipation of GDP increasing.
Also this model is completely disconnected from real wealth producing activities (which I have also heard suggested being the ‘commodity’ that backs money) which I believe is the whole point of a system like this – to increase the money supply in direct proportion to new wealth to ensure ‘stable’ prices.
Any system, in my opinion at least, that increases the money supply without mixing land + labor is just a wealth redistribution scheme to benefit the producers of the new money at the expense of everyone else that holds the currency.
If people are so opposed to a pure gold standard how about a currency based on a basket of commodities? The exchange traded commodities from this image I just happen to have handy looks pretty stable in relation to each other or you could just pick and choose and kick some off when they get too highly valued/devalued in relation to each other.
Probably should throw out the immediatly consumable ones like rice and natural gas though…
Your argument is nonsense.
It is not a model, but an identity.
Well, thanks for clearing that up…
What, I didn’t properly calculate in the Velocity of Money Fallacy or something?
You are welcome
What fallacy do you speak of?
I recommend that in the future, before being so condescending, you actually read up on some austrian economics, considering you’re on an austrian economics forum…
Is velocity like magic?
I think Austrian economics holds many truths, but I will just not accept them blindly. Money is backed by gdp. Why would you think otherwise?
I don’t know if this is a non-sequiter or if Austrians completely reject the oldest, surviving theory in economics. Is your concern with velocity of money or with the QTM or both? Or is your issue with the empirical findings of the Friedman and Schwatz paper (1963)?
I don’t fully believe in the Fisher identity. I don’t know what economist does. It is a basic identity that shows money is backed by gdp.
Because the idea makes no sense at all, and there are historical examples of prices going up far beyond what could be accounted for by monetary inflation and changes in production?
Prices only fluctuate relative to goods and services (i.e. gdp), albiet numerous casual forces. Gdp is an anchor. A $10 dollar haircut is a $10 haircut, until it becomes a $12 haircut.
Provide your sources, and then we can discuss these cases.
One would think that if the GDP was the determination of the quantity of money in circulation then the Fed would target the supply of money instead of interest rates in their monetary injections.
Same with the European Central Bank who targets solely interest rates unlike the current shenanigans the Fed has been up to as of late.
Or, if you prefer, you can always get it straight from the horse’s mouth…
But if you really want to defend monetarism you could start by explaining how the model, err.. ‘identity’ explains the distortions in relative price levels as a result of ‘liquidity injections’ I suppose.
----edit----
Or possibly explain the GDP - monetary inflation link in relationship to this article.
I am not defending monetarism, but I will defend that money is backed by goods and services. Why is this so hard to comprehend?
Two reasons…
- You haven’t really explained anything at all so far in this thread.
- It isn’t based on reality as seen by the actions of the people in charge of the money supply.
From your rather criptic answers it is really hard to get at what you’re trying to say since there is no direct connection between the production of money and goods and services under a fiat currency system. None at all.
Even Friedman admits that they wing it…
Money is relative to gdp. I explained this.
This is a completely different question based on your schism or your wounded ego. This issue never came up, until now.
My initial response answered the original post. Did it not? What is your question?
Hell, I’m just trying to figure out what you’re on about…
You obviously haven’t come here to discuss ideas but to merely throw out grand proclamations, circular arguments and now have reverted to ad hominem attacks.
Why bother?
Money is backed by gdp. Did I not already state this?
You are laughable. When did I make an ad hominem attack other than now? Understand the definition before you carelessly toss it around. Last time I checked, the money supply is endogenous.
Just because I find your insight fascinating I’ll try a different approach…
How is money backed by GDP?
Wait, let me guess, because of the Quantity Theory that has been discredited for a good 90 years or so by Benjamin Anderson.
All you do is state ‘money is backed by gdp’ as if it’s some given fact and respond to any discussion to clarify your position or disprove this ‘fact’ by saying ‘money is backed by gdp’. It’s a brilliant strategy really. I mean the only reason I haven’t given up on you yet is because someone who believes so absolutely in a fact such as this must know something that I must now know. Knowledge is contagious as they say.
Perhaps I just misunderstood you because of my wounded ego or something?
Nobody is asking you to accept anything blindly. That’s why rather than making empty statements I gave you two long articles to read, which should hopefully explain what I’m saying.
Have you read the articles? I haven’t fully made up my mind yet on the issue. In order to do so, I usually analyse the information and then write my own essay to make sure I understand everything, only then can I take a real stand on the issue. As for it being the oldest surviving theory, what does that mean? It means that those mainstream economists (keynesians, monetarists, neoclassicals, all of them statists) and the governments they are backed by, have found this equation highly useful. Whenever they inflate the supply of money, they would say that the velocity adjusts itself to offset the loss in purchasing power, and proclaim the inflation bears no significance. It is obfuscation, and you could see this if you applied the law of diminishing marginal utility to money, rather than making up the concept of velocity. For millennia people have believed the sun orbits the earth, and all who protested were ridiculed and often called heretics. If this is your argument then I’m proud to be a heretic here.
I’m once again going to assume you haven’t read those articles, so I’ll quote a paragraph for you.
Now regarding your idea of GDP backing currency. In order to back a currency, the issuer must actually own the backing. So if the central bank of Goldland decides to print some dollars, it must first acquire an equivalent amount of gold with which to back the gold, but most importantly, the bank must own the gold. The idea of backing something is that the paper money is essentially a derivative of the backing, and at any point in time, should you wish to redeem your paper money for gold, then you can do so. Replace gold backing with anything else, such as silver, copper, or uranium, and the idea still holds. You also have to realise where backing for currency comes from. Paper money was not always there, at first people traded in gold coins, and only then was paper made a derivative of it.
Your idea of backing gold with GDP doesn’t make sense, because the Federal Reserve, or any other issuer, cannot own all of the goods and services within the economy. I would not be able to walk in to a federal reserve bank, and redeem my dollars for goods and services, because the Fed doesn’t own them. Lastly, since people haven’t seriously used barter in a very long time, you can’t really say that “goods and services” were an actual currency from which paper money was then derived, precious metals came in between.
I understand for you the idea of matching economic growth to money supply growth seems attractive, and of course, how better to do this than to peg money supply growth against GDP growth, but the idea is unnecessary. There is absolutely nothing wrong with deflation, and in fact deflation is very beneficial. Look at it from the micro level, can you honestly say that the rampant deflation (I’m using neoclassical definition here) in the computer industry were a bad thing? The fact that every time a new technology comes out it can become twice as cheap in just a year? Surely no consumer can complain of this, and in an unrestricted market with no wage and other cost controls, businesses would adequately adjust to deflation.
They are wrong. It probably increasing due to technology. Technology eases the transaction cost.
And? I know all about the scientific paradigm shift from a geocentric to a heliocentric perspective. Your useless point is?
I already stated concerns about the velocity issue, did I not?
The money supply is endogenous. I do realize that there are contradictory studies.
With goods and services. You cannot back money with money. I do believe this is the crux of the argument.
Double coincidence of wants.
Then don’t walk into the Fed demanding a haircut or HDTV. Are you an idiot? The Fed is not Wal-Mart.
It is attractive and necessary.
Depends on what type of deflation.
That is good deflation. Being cautious to invest due to falling prices is bad deflation.