How would you respond to these questions posed by my professor?

[Esuric]

@JonBostwick

I still stand by my statement. Consumer demand would increase (shortage/Boom), emphasis on consumption vs savings (glut/Bust) and then a correction(return to people’s actual time preference)

Consumption does not cause booms. Investment does.

[Bostwick]

@Esuric

@JonBostwick

Ah, but the marginal utility of the dollar is in its purchasing power not its nominal value.

The marginal utility determines its purchasing power.

You’ve stumped me again. By effecting how many of those new dollars enter circulation?

[Lilburne]

@JonBostwick

A price revolution would occur if people’s expectations of the purchasing power of their new dollars are not in line with the actual purchasing power, but the economy would return to its original state as expectations and reality realign.

Mises, HA:

"When eventually, in the further course of the increase in the quantity [p. 413] of money, all prices have risen, the rise does not affect the various commodities and services to the same extent. For the process has affected the material position of various individuals to different degrees. While the process is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices of the things they buy have not yet risen or have not risen to the same extent. On the other hand, there are people who are in the unhappy situation of selling commodities and services whose prices have not yet risen or not in the same degree as the prices of the goods they must buy for their daily consumption. For the former the progressive rise in prices is a boon, for the latter a calamity. Besides, the debtors are favored at the expense of the creditors. When the process once comes to an end, the wealth of various individuals has been affected in different ways and to different degrees. Some are enriched, some impoverished. Conditions are no longer what they were before. The new order of things results in changes in the intensity of demand for various goods. The mutual ratio of the money prices of the vendible goods and services is no longer the same as before. The price structure has changed apart from the fact that all prices in terms of money have risen. The final prices to the establishment of which the market tends after the effects of the increase in the quantity of money have been fully consummated are not equal to the previous final prices multiplied by the same multiplier.

The main fault of the old quantity theory as well as the mathematical economists’ equation of exchange is that they have ignored this fundamental issue. Changes in the supply of money must bring about changes in other data too. The market system before and after the inflow or outflow of a quantity of money is not merely changed in that the cash holdings of the individuals and prices have increased or decreased. There have been effected also changes in the reciprocal exchange ratios between the various commodities and services which, if one wants to resort to metaphors, are more adequately described by the image of price revolution than by the misleading figure of an elevation or a sinking of the “price level.”"

Notice that, nowhere in the above (or anywhere else), does Mises say that the above is only true for commodity money, and not true for fiat money.

[Bostwick]

Thanks. I’ve read that but I appearently missed the key part.

@Grayson Lilburne

The final prices to the establishment of which the market tends after the effects of the increase in the quantity of money have been fully consummated are not equal to the previous final prices multiplied by the same multiplier.

That addresses the latter part of my statement, as the economy would normalize to again reflect actual consumer preferences, except they would be new preferences.

@JonBostwick

A price revolution would occur if people’s expectations of the purchasing power of their new dollars are not in line with the actual purchasing power, but the economy would return to its original state as expectations and reality realign.

[Lilburne]

@JonBostwick

That addresses the latter part of my statement, as the economy would normalize to again reflect actual consumer preferences, except they would be new preferences.

@JonBostwick

A price revolution would occur if people’s expectations of the purchasing power of their new dollars are not in line with the actual purchasing power, but the economy would return to its original state as expectations and reality realign.

If the preferences were new, and as Mises wrote, the data of the market was altered, then wouldn’t that be disqualified as a return to its “original state”?

[Bostwick]

@Grayson Lilburne

@JonBostwick

That addresses the latter part of my statement, as the economy would normalize to again reflect actual consumer preferences, except they would be new preferences.

@JonBostwick

A price revolution would occur if people’s expectations of the purchasing power of their new dollars are not in line with the actual purchasing power, but the economy would return to its original state as expectations and reality realign.

If the preferences were new, and as Mises wrote, the data of the market was altered, then wouldn’t that be disqualified as a return to its “original state”?

Yes. I suppose I should have said it corrects the latter part of my statement.

[Bostwick]

I guess I should restate my position in light of that.

The total amount of money is not important, what matters is the change in the money supply because of how the price system transmit information. If the money supply is doubled but people had knowledge of it so adjusted prices accordingly, no changes would occur. If prices were adjusted upward, people would find that they did not have the extra money they thought they did.

If either a) people didn’t know that money had doubled or b) didn’t know they should raise prices, then a short term shortage would result, followed by a glut in the middle term, and a correction to peoples real (and new) preferences in the long term.

[Esuric]

@JonBostwick

The total amount of money is not important, what matters is the change in the money supply because of how the price system transmit information.

What if money demand changes?

@JonBostwick

If the money supply is doubled but people had knowledge of it so adjusted prices accordingly, no changes would occur.

This has already been dealt with. I suggest you re-read mine and Grayson’s positions.

@JonBostwick

If either a) people didn’t know that money had doubled or b) didn’t know they should raise prices, then a short term shortage would result, followed by a glut in the middle term, and a correction to peoples real (and new) preferences in the long term.

Preferences would change. There are no “real” underlying preferences; preferences are in continuous flux. There is no “general equilibrium.”

[Snowflake]

@Grayson Lilburne

Putting a “/2” next to everyone’s dollar bills would effect different cash holders differently, because of differences in the rate at which the marginal utility of dollars declines for each person.

Why would halving the numbers on all bills affect their marginal utility differently for all holders? The number simply reflects that bill’s relative worth to other bills. This stays the same.

[Giant_Joe]

@Snowflake

@Grayson Lilburne

Putting a “/2” next to everyone’s dollar bills would effect different cash holders differently, because of differences in the rate at which the marginal utility of dollars declines for each person.

Why would halving the numbers on all bills affect their marginal utility differently for all holders? The number simply reflects that bill’s relative worth to other bills. This stays the same.

Just to comment: I think there are two issues here that we keep going around.

1. What money/accounts are changed when the /2 happens?

2. Are we assuming perfect knowledge of the fact that the money has changed, or are we not?

I believe the strongest point is that people will think differently of their money when it changes, so they will act differently. What we do know is that monetary expansions in a fiat currency regime lead to lower time preferences, and that the opposite may be true for monetary contractions.

Some people may see this move as an increase or decrease in the money supply, and will act accordingly.

[Snowflake]

@Giant_Joe

1. What money/accounts are changed when the /2 happens?

All of them, simultaneously. It would be a completely different problem if there were inflation via credit expansion or something.

@Giant_Joe

2. Are we assuming perfect knowledge of the fact that the money has changed, or are we not?

Mmmm… I’m assuming that people might freak out at first, but then when they turn on the news and “reports are being confirmed that everyone has half as much money as before”, people will relax.

But it was already pointed out this could screw up loans, but loans typically have expected inflation/deflation written into them. If entrepreneurs had anticipated the possibility of a change like this, they would have written it into their contracts.

[Bostwick]

@Esuric

Preferences would change. There are no “real” underlying preferences; preferences are in continuous flux. There is no “general equilibrium.”

Not equilibrium. Monetary influx will deceive actors causing the market to no longer reflect consumer demands (Production structure will become too long).