Wow…just wow.
The timeless question. It is backed by labor stemming from Locke
Fail. Friedman revived it. 1963 with Schawartz
Or you could state where I personally attacked you, since you made the claim. When did I personally attack you? Do you not understand the definition of an ad hominem?
I expect you to answer these questions.
I can’t make much sense out of money should be backed by GDP. I think a suggestion like that deserves further elaboration.
As I understand it, GDP is the sum of all sales of stuff produced in the country (or to be more precise, the value-added of each sale to avoid duplicating its calculation). I can’t make much sense out of it because:
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it is a moving target – an increase on the money supply will result in an increase of GDP. Those figures pretty much go hand by hand…
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if you somehow calibrate the money supply to last year’s GDP, then I’m not sure using the term “backed” makes much sense. I’m not an economics student, but I think the term “target” is the one used by central banks when they put the money supply in function to statistics like that…
It would be interesting to know what exactly he meant by a ‘gold standard’. Oftentimes when I am advocating a ‘gold standard’ I encounter objections, the roots of which are based upon the incompatabilities of introducing a gold backed currency into the current system as is. I think I ‘gold standard’ would mean a comprehensive overhall of the financial, legal, and taxation systems.
Anyway, I find the assertion that GDP should back currency as interesting. I believe some other posted mentioned, a $10 haircut is a $10 haircut until it is $12. I suppose that makes some sense. That is, this dollar is worth 4 gumballs because it can purchase 4 gumballs or whatever else. I suppose the argument is that backing the dollar with GDP is like saying this note is backed by all goods and services produced by the country of origin. It sounds like something you’d read out of the Dao De Djing…‘because it is backed by no [one] thing, it is backed by every thing.’
I guess a followup question would be, what do you want the currency to do? It seems like the monetarist policies we have now are to encourage economic expansion and production quickly and in the short term. I would like the money to retain its purchasing power over the medium and long term, something I think is incompatible with what we are doing now. These are two different goals.
I think my biggest skepticism to a GDP backed currency is, like you, the way it is calculated. Not really the amount of variables though, conceptually GDP is a straightforward calculation. But whose GDP calculation is official; what of the temptation to manipulate the calculation to the state’s advantage. Think of inflation calculations.
Yes my point was that they are wrong, and are deliberately obfuscating the truth using velocity. I think you’re agreeing with me here.
My point was that here: “I don’t know if this is a non-sequiter or if Austrians completely reject the oldest, surviving theory in economics.” you attempted to somehow justify the theory based on its “survivability”, rather than based on its merits, or lack thereof.
And yet despite these concerns you use the equation of exchange as a basis for your statement that GDP backs currency. You did so in your first post to this thread.
Please elaborate.
…and how are these goods and services redeemable? Any backing must be redeemable, such is its purpose. If you were to back money by GDP (which is the sum of everything produced in an economy per annum) then how would you redeem this? The issuance of currency does not produce any of the goods and services part of the GDP, and thus they cannot ethically confiscate them to use as backing.
Yes, what’s your point?
I’m beginning to think this is all an elaborate joke. You yourself suggested this. You’re defending the position that currency is possible to back by GDP, indeed you’re saying it already is. Never mind the fact that when there is a bank run more paper is printed, rather than GDP redeemed. When currency was truly backed by gold, you could walk into any bank and redeem your paper money for gold, because the gold belonged to the bank (or the people who deposited there in return for paper money) and was used as an asset. Obviously you can’t redeem paper money for haircuts or an HDTV, because GDP is not owned by currency issuers. That was my point, and why your entire idea is a fallacy. Then when I point this out, you somehow think I’m the idiot?
Are you familiar with the Austrian Business Cycle Theory? I think you are not, since you think inflation is necessary.
How is being cautious a bad thing? ABCT shows how inflation and easy credit created ex nihilo is precisely the reason for the boom-bust cycle. Besides, you have yet to show how falling prices are a bad thing. Together with falling prices, in an unconstrained market, we would also see falling costs. In other words, profits are not jeopardised by deflation, except in state-capitalism. And since I’m not defending state-capitalism, your point about deflation is moot and fallacious.
Thanks for the clarification.
So could legal tender laws on Fed Notes be considered an attempt at ‘owning GDP’ by a ‘legal proxy’? It appears to me that legal tender would be the primary means to have a currency ‘backed by GDP’. I could issue my own currency backed by nothing and claim it is backed by GDP but no one would accept it. Wouldn’t a more appropriate way of describing a currency ‘backed by GDP’ be a currency ‘backed by legal tender’ and the legal punishments for not accepting it as payment?
I don’t think legal tender can make GDP redeemable, even as a proxy through taxation. e.g. I would be able to redeem paper money for government tax revenues…in the form of…paper money? The government would have to actively nationalise entire sectors of the economy everytime there were a bank run, whereas today they keep their nationalisation to just the banks (Northern Rock).
Well that’s what legal tender is, government using coercion to force people into using their currency. I don’t see why we need to change the definition of what backing is to use with legal tender. Legal tender implies the use of force, whereas backing implies redeemability. The two concepts don’t seem to mesh for me. If dollars, euros, pounds etc. were redeemable for commodities such as precious metals, then there would be no need to use legal tender and coercion as people would themselves voluntarily use such backed and redeemable currencies. Thus legal tender exists only where there is no real backing.
Yes and Yes.
What I was driving at is the emphasis that those who would advocate a GDP backed currency face the dilemma of redeemability, as you point out.
Going back to the supposed underpinning of this GDP argument, the only reason you can exchange dollars for a haircut, or a HDTV, or gumballs is because of legal tender. Legal tender provides a semblence of ‘redeemability’ because everyone is forced to accept it in exchanges. So GDP backed currency could ‘work’ just as well as a debt backed currency ‘works’.
So I suppose my next question would be, why would one advocate a GDP backed currency; what advantages would a GDP backed currency have over the current debt-backed currency? What would be the difference? The supposed advantage would be the elimination of debt backed currency and the inability to inflate beyond growth, so theoretically prices should remain stable, correct?
But then as the currency is now backed by GDP that would portend the note issuer has the authority to lay claim to all goods and services. Side note: isn’t this similar to what we have now because as loans from central banks are deposited to other banks, they become the basis for yet more loans. In this way, doesn’t the central bank ostensibly lay claim to GDP because of the pyramidal nature of fractional reserve banking?
So that would leave a theoretical price stability advantage of GDP-based advantage over a debt based currency? If we kept a fractional reserve banking system, how would it not be inflationary?
Sorry if this seems like rambling, because it is… but I would like to understand the perspective thoroughly to be able to counter it.
Well in that sense then GDP backed currency is debt backed currency. At which point in time we’re just looking at a fancy name for the same old fractional reserve banking, and all the trouble we know that brings about.
Well, as AC has mentioned already, the money could be printed up in anticipation of GDP growth, and this itself would create artificial booms. The busts in turn, could always be blamed on “rampant capitalism” as the mainstream economists have done far too often.
Yes, the fractional reserve banking system will inevitably create a net flow of wealth from productive individuals to banks. The entire boom-bust cycle could be looked at as a wealth redistribution cycle. During the boom people become endebted, during the bust, people’s wealth is confiscated when they become insolvent. All the time, the amount of debt relative to money within the economy spirals out of control, increasing the rate at which people become insolvent. I’ve made an excel spreadsheet of how debt has grown beyond the money supply over the last five decades, I think right now there is 918% more debt than actual money (using TMS). The government of course, with all of its slogans for material equality, blatantly bails out these banks whenever they are in difficulty, so that they can continue their wealth redistribution.
It would be inflationary, but even if it were possible to create price stability, e.g. 0% inflation, this would not be desirable. If we define mainstream inflation not as a general rise in prices, but as a general rise in prices above what they would be without increases in the money supply, then even a 0% average price change would still be inflationary, since under free market conditions prices fall whenever there are improvements in the labour to capital ratio, the capital structure, or technology. And as the ABCT has shown us, any manipulation of the money supply will lead to mistakes in calculation and cause malinvestments. Or rather, any obfuscated manipulation will lead to malinvestments. For example, an annual rise in the amount of gold by 1% is something everyone can plan for and accomodate in their calculations. The current jumping around of interest rates and money supply decided by a committee of bureaucrats is no way near as forseeable, even if people actually knew what was going on, which by and large they don’t.
The only one who brought up velocity was you. Lets simplify. M = PY. Therefore, money is backed by gdp and inflation.
Read the intro to this study (it is a satisfactiry one that I quickly googled). Do you understand the difference between an endogeous and exogoneous? http://www.imf.org/external/pubs/ft/wp/2000/wp00188.pdf.
If you are still interested, I can dig deeper. I don’t think endogeneity of exogeneity of the money supply was determined until 1981 by Sims and the increase into the understanding of time series analysis.
If money is endogenously determined, then that means that the causality flows from gdp => money supply.
Money becomes worthless if you cannot redeem goods and services.
The difference between money supply and gdp is in/deflation, is it not?
Yes, and joke is on you.
NON-SEQUITER.
You fail. Give me a $US 1,000 and I will prove you are being and idiot (no, i really don’t think you are an idiot). I will but a haircut, an a HDTV. Gold is only a valid form of currency since people VALUE gold. If the barber did not value gold as currency, but as Pokemon Cards, the you would have to trade in your gold for Pokemon Cards before you got a haircut.
I have read the 2 papers I could find. Mulligan, which is a good paper and someone else. I am forgetting the second. It is lying around somewhere. There is a lack of empirical papers on the ABCT.
It is BAD when you fail to invest or consume due to EXPECTATIONS of falling prices.
If you could link me to some literature, it would be appreciated.
Not because it is “legal” tender, but since it is a stable and reliable source of currency.
The same argument applies to gold, silver, diamonds, etc..
Correct. Inflation should tried to be kept constant. The other reason is a volatile commodity due to a stable money supply.
No and how?
The the identity MV = PY would still holds without fractional banking.
Yes I bought it up to demonstrate that the equation of exchange has at least one fallacy in it. I need to read up more to find where else it goes wrong, but at the very least the equation of exchange is a purely mechanical relationship that does not (and can not) take into account subjective valuations, and the entire psychological aspect. I used the example of velocity being fallacious to show that if at least several aspects of the equation of exchange have been disreputed, then using it as a basis for your argument is moot. Why don’t you rather explain, from start to finishing, the reasoning behind your idea of backing. Also, while you’re at it, what is your definition of backing?
I’ll look into it later this evening, thanks!
The issue is not what one can buy with money. The issue is the backing this money has. If I issue a new currency and use legal tender to coercevily ensure it is being used to buy goods and services, then this is what the money, as a medium of exchange, can buy. Backing refers to the assets that underlie the money, with the purpose of redeeming them if the money supply is being inflated, and so put a phsyical limit on inflation. This is why all backing for currencies was removed in most countries many years ago, so that governments and banks could inflate without limits. I think what you’re doing is saying that since money can be used to buy goods and services, then goods and services back money, but this would nullify the purpose of backing, which is to restrict inflation and the devaluation of a currency. Since backing refers to the assets an issuer of currency owns (as a safeguard against inflation) then GDP cannot serve as backing because it is not owned by the issuer of currency.
You may have noticed Austrian economics is based on a priori, and not empirical evidence. Having said that, you could always read Murray Rothbard’s “The Great Depression”.
It is consumption and investment (in the absense of inflation of the money supply) that would cause the lowering of prices in the first place. Thus, the minute everyone stops investing, prices would stop falling. You seem to be thinking that deflation just magically occurs for no reason, and then people stop investing and spending, while in reality investment is what drives deflation. If I remember correctly this is classical Keynesian dogma. By the way, once again look at the computer industry. Have falling prices reduced investment or spending on computers, phones, etc?
I could send you my essay :P, which is basically a summary of Rothbard’s book I recommended above. The book itself should be somewhere on this website.
Stable and reliable? The dollar today is worth 3% of what it was worth when the Fed started inflating it in 1913. I don’t see anything stable about that. Nor is it reliable, since the Fed can create an unlimited amount of dollars without any backing, by simply writing a check on itself. Moreover, commercial banks can inflate the currency by lending out demand deposits.
I don’t see how any of these arguments could apply
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Gold, silver and diamonds, when used as backing, are physical, and have nothing to do with “semblance”.
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Nobody is ever forced to accept a currency in an exchange without there being legal tender.
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Physical backing for a currency restrict the amount of fractional reserve banking that could go on, since sooner or later bank runs would occur. Thus, there is a limit on the amount of debt created ex nihilo.
2% per year inflation is not constant, it is exponential. Look at the graphs of M2, M3, or MZM showing the growth in money supply, you can see it follows an exponential curve. Moreover, since any amount of inflation only serves to devalue a currency’s purchasing power, and hence, literally steal from the people, I don’t see how anything above 0% monetary inflation is possibly justified. I think I’ve already invoked somewhere here the metaphor of wine and water.
If by volatile you mean as a result of free market interactions, then all prices are always volatile, regardless of a currency. How is this a bad thing? Volatility, is what happens when prices adjust to demand and supply. The same occurs with a currency. I hear this word mentioned often in my mainstream econ textbook to justify government intervention of all sorts.
Because backing is defined as the assets for which a currency issuer is willing to redeem their currency.
You did not address the concern regarding GDP as backing not placing any physical limit on currency expansion. You do know how currency expansion cycles work right? You also know that the equation of exchange has nothing to do with these cycles?
Which means you don’t really know much about it. You should read the more basic material first, such as Mises’ or Rothbard’s work on it, or perhaps even Huelsmann’s.
In what sense?
-Jon
I got the 404 - Page not found on that link.
I would suggest in return that you look into Mises’ insight into how money is valued in Human Action as that is the universally accepted definitive explanation of ‘money’.
In The Real World™ you are buying a haircut or HDTV not with the money itself but with the labor or goods you sold to get the money to buy the items. This is where the monetarist theory falls apart.
If you were to print up some new money based on anything but an increase in real wealth (mixing land with labor) then you have just produced a fraudulent claim on real goods and services at the expense of everyone else who has to work to get their claims to haircuts and HDTVs as they will be able to buy less with their money because of this ‘necessary’ inflation.
This, along with what Fred said, is why inflationary policies are really wealth redistribution schemes that benefit mostly the government and banking cartel along with their Big Business allies who generally get the new money first before its inflationary effects are spread out to the economy as a whole.
I’ve heard of someone creating a mathematical model that illustrates the ABCT. But if you really must have empirical evidence as to the validity of the ABCT then maybe the press release for Hayek’s Nobel Prize in Economics where they commend him for his work on the subject may suffice.
I love dragging that link out when people make the claim that the Austrian School is just a bunch of crackpot subversive charlatans that nobody in ‘real’ economics takes seriously by the way. Not saying you hold that view or anything.
The two are polar opposites so I don’t really understand how you could lump the reasons behind the failure to engage in either into one group but that’s not that important.
If you accept that prices are signals then lowering prices could mean a number of things. Maybe overproduction has occurred, efficiency increases or a whole different fungible product is pushing down the prices of the good in question. What’s not an issue with any of these cases is that the consumer and economy as a whole benefit from the lower prices because they now have money to spend in other areas that they wouldn’t have had otherwise. Yeah, the producers bet and lost if they didn’t expect the prices to fall when they made their plans but it does not follow in any conceivable way that prices should be held higher to benefit the entrepeneurs who made a bad business decision and have lost money. That would be the practical application of the Broken Window Fallacy.
It would also follow that investment into an area with falling prices might not be such a good idea if you expect them to fall further, this is not a bad thing but merely price signals doing their job of guiding resources into the most efficient uses.
Having the State, through their puppet central bank, manipulate prices so that they always rise as a general rule would make these price signals less accurate than if they were a pure reflection of consumer’s valuation of a good or service. Now you have to go through all sorts of complicated steps to determine if the price changes are a result of monetary inflation, supply/demand issues or government intervention among other.
Economic calculation under such an environment becomes a much harder task which explains how savvy businesspeople get suckered into the regular business cycles. The price signals get so distorted that what they think is a good idea turns out to be a malinvestment in the long run and then these misallocated resources need to be liquidated into profitable projects, what is commonly called a recession.
From what I’ve read the gold supply was increased at around 2% per year which is coincidently the inflationary target most central banks aim for. Not a target to GDP as I stated before and you promptly ignored but an inflationary target with the money supply.
What gold doesn’t do is to allow the central banks to paper over the busts caused by the inflationary booms which is why there is a long history of governments allowing banks to refuse to return the private property of their customers (specie) in exchange for the notes they issued under a ‘redemption on demand’ contractual agreement.
The only place that holds is in a static system (or as Rothbard puts it an Evenly Rotating Economy).
As we all know there is no such animal existing in reality (or the socialists would all jump for joy since Mises admitted that socialism would be possible under such a system, well, assuming that nothing was changed during the change over to collective ownership) and there is ample evidence that this ‘identity’ isn’t able to reflect The Real World™ (as per my arguments earlier) then it would seem safe to assume that this formula has no basis in either reality or a proper economic theory.
Sure, if you want to construct static models then it has some validity and could even be quite useful but that doesn’t mean that any findings from these models are able to directly translate over to The Real World™.
And that’s what the Austrian School is interested in — not some aggregate amalgamation of endogenous actors operating exogenously in concert as predicted by some theory of an economic duality.
Erase the “.” after “.pdf”. It’s distorting the link.
-Jon
The problem with GDP backing is the fact that GDP is a collectivist economic theory. If your barber accepts POKEMON cards, that is his PERSONAL currency. Except a barber’s, or anybody’s business, would fail miserably in a nation with Legal Tender laws if they used PK cards. HIS goods and service is backed by HIS currency, not some nations currency.
People come to accept a general commodity as money, so everyone may have HIS currency, but it is backed everyones currency, gold.
Nations produce nothing, people do. That’s why I can’t pay Euros as money in the U.S., with it staying as Euros instead of being transfered into dollars. Gold is gold no matter where it goes.
Nevermind most of my economic BS above, but am I the only one here who thinks that GDP is part of collectivist ideology, regardless of how useful it is in calculation.
It is not a fallacy, but an identity. It becomes a theory once you hold velocity constant. There are issues with this basic theory. Is your issue with the identity or with basic theory?
I am not sure where you are going with this, but It is very difficult to place a value on subjective valuations.
There is a clear relationship between money and gdp. Regardless of the money you use, money is backed by gdp. You can exchange your money for goods and services. The difference between money and gdp is called inflation or deflation.
This is my argument.
I don’t care if money is backed by gold (i.e. money backed by money). You can trade your money in for gold, but what are you going to do with gold? Buy goods and services.
This is blatantly false. There is a clear indication between a CB independence and inflation. Also read this short paper for more insight: http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
I know it is circular, but then again MV = PY. The difference between money and gdp is inflation or defation.
I understand your concerns, but a gold standard will mostly invite deflation and hinder investment. As far as I am concerned, gold is a piece of metal. I have no use for it.
It is ideal to keep money aligned with gdp, but it is better to have slight increases in inflation than deflation.
I have read “The Case Against the Fed” and thoroughly enjoyed it.
Please do. I would like that.
I know that the dollar is decreasing in value. But the dollar in 1913 is not the same as the dollar in 2008. The difference is inflation. There are ways to calculate the difference in purchasing power.
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I don’t care if people “value” rocks and minerals. What I do care is exchanging those rocks and minerals for goods and services.
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False. People were forced to accept currency since the majority of people do. I could care less if gold or Pokemon Cards are currency. I just want my goods and service. The government has no right to enforce or legalize tender (I never supported government making tender legal. Please don’t assume this).
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Physical backing is nothing but rhetoric for “money backing money”.
I said, The other reason is a volatile commodity due to a stable money supply.. It was a play on word. I was joking around, but there is some truth to it.
This is a tangent, but I will address it. One can expand fiat currency, but then fiat currency will becomes so worthless that another form of currency will take over. One can practice targeting the money supply with the gdp, so there is no inflation or deflation.
This is what the Fed currently does with IRT and OMO (Interest Rate Targeting policies and Open Market Operations). I am not making a case for the Fed, but they do adhere to a simple formula of MV = PY, but err on the side of inflation
To elaborate on this sentece. I am an empiricist. I believe that a priori truth can only be found via sensory experience.
Mises followed in Menger’s anti-empirical footsteps. Hayek adopted more of an empirical framework, and recognized that one could “predict patterns”, such as what would happen with a tax change.
It is very difficult to pigeonhole an economists into any school. I don’t share the Austrians distaste for empiricism. Otherwise, I am very aligned.
That’s the whole point, it is impossible to place a value on a subjective valuation. That means you can’t pigeon hole everyone into a pretty little mathematical formula and expect to draw any valid conclusions from it.
There’s part of the problem, you are using a different definition of inflation than is used around here. Inflation and deflation are caused by the increase or decrease in the money supply. If you add more money you inflate the supply and if you subtract money you deflate it.
Yes, we all know the party line… lack of ‘liquidity’ caused by the restrictions placed on the money supply because of the gold standard caused the Great Depression.
You make the assumption that we argue from a position of ignorance and all it will take for us to open our eyes is some propaganda from the Fed. It’s actually kind of insulting really.
That explains why the 19th century was one of the most prosperous times in the history of humanity then? Yes, there was monetary deflation but there was no shortage of capital investments overall.
You’re using the same tired old arguments that Rothbard has done a fine job of refuting in his many works.
A good start I guess…
Umm, no.
Yes but you are going to have monetary inflation and price inflation. Those are actually the only two ‘inflations’ that the economists really care about as far as I can tell.
Or people for that matter since they are the ones that hurt them in the long run.
I’m actually interested in what you think inflation means if not one of the two terms above? And no, ‘the difference between money and gdp’ isn’t a sufficient definition.
Well, not that I expect you to answer any of this anyway…
Is this guy serious? You’re in the wrong forum.