Increasing money supply = inflation?

Economics Economics Questions
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41

You seem to postulate that more (albeit different) regulations on what businesses and individuals may or may not do is a solution to a problem that I understand to be caused by regulation and coercion, or simply put, restrictions on liberty and disrespect for property rights and liberty.

Actually the system I described (I’ll actually reveal what it is later on) is the very essence of liberty and property rights. Think for a moment about what I’ve described previously. When we pay interest to a bank who does it serve? The banking Oligarch’s, not us. In a system where no interest is required (that prevents deflation and inflation also, by the way) and puts $200,000 to $300,000 dollars back in our pockets due to the erradication of interest on a $200,000 home we purchase. Whom does that serve?

What we’re talking about then is economic Liberty! It’s the people who are in debt up to their ears due to interest that I want to see liberated. Let them keep their own money, there is absolutely no need to deprive the American people of the fruits of their labors. I will try to present the whole system so you can see very clearly what I’m talking about shortly.

42

  1. Either you didn’t understand my point or you don’t agree with it when I described the money creation process. There is no time preference in our present economic system. How can you put a time preference value on money created by an electronic transfer that probably cost the bank a few dollars? This money is not earned, it is created on the spot. This is the way money is created, believe me.

  2. I’ll answer the question about what takes the place of banks shortly (we’re in the process of moving this week so it’s been hectic). There is such an infrastructure though and it issues money and takes payments.

  3. I wish I could! Unfortunately they have what we call a monopoly!

43

Actually I have Human Action, I’ve read books by both Rothbard and Hayek. I consider myself a Libertarian/Conservative. I’m not an expert by any means on Austrian Economics but I’ve a basic understanding of it.

Got a question for you: Have you ran across any Austrian literature that specifically addresses interest and it’s justification?

As far as investment goes. I’m sorry, I see it only as a form of legalized gambling. If business needs money for capital formation / infrastructure, it can be supplied in exactly the same way. A business pledges as collateral a portion of their accumulated capital and money is issued interest free and paid back at the rate of depreciation of the related asset. Very simple solution.

You mentioned allowing “competing financial institutions”. But you would have to prohibit the system I mentioned because no other financial institution would remain standing but this one system. You can’t compete against 0% interest! A modest fee is all this system would take to cover it’s expenses. Banks would fight it tooth and nail and thats why they refuse to even discuss it!

44

YES!!!

Time preference explains it.

God, I just realized how hard Man, Economy, and State and Human Action are with respect to interest. It falls out rather nicely in other places in a much more simple way. I found this book : http://library.mises.org//books/Robert%20P%20Murphy/Lessons%20for%20the%20Young%20Economist_Vol_4.pdf

It seems to do a particularly good job of laying it out in a simple straightforward way. Interest is determined by variations in time preference. Chaper 12 of that book states :

Anyway, that’s a start. I also have a podcast series of lectures by Rothbard. That I listen to when I run, here’s the link.
http://mises.org/media/965/Capital-Interest-and-Profit

It’s probably the clearest explanation I know of.

45

Actually, it seems that by telling someone what kind of contract they can enter into (only one without interest) that the system you describe restricts liberty and property rights (by stipulating what a person may and may not do with his own property).

C’mon, now… When you take a loan, YOU agreed to pay that interest. You didn’t have to take the loan. You could have saved up your money and bought, the house for example, debt free. When a bank takes a risk and loans someone capital in a free market, whom are they serving? The person taking the loan that wants to consume now.

Interest is not the cause of inflation or deflation.Whether you mean inflation as a rise in the general level of prices or by its true meaning, an increase in the monetary supply, the charging of interest is not the cause.

You know how one keeps all that money? By saving money, consuming later, and not going into debt. Even if interest was the cause of inflation, it would be caused by people that refuse to save and agree to consume now by paying interest over time.

46

Thanks David. I’ll look into that straight away.

47

It’s not really stipulating or forcing anyone to enter into a contract to pay at 0% interest really. You can go ahead with another system that does but lets be realistic here. What would your choice be? I know what mine would. It is therefore for all practical purposes inevitable that people would choose the 0% option.

When we take out a loan with a bank we are (I would argue) forced into that contract. The financial institutions are a monopolistic system and no real alternatives are allowed. Saving one’s money to purchase a home is totally unrealistic for the average consumer. I think you may be missing the point here though. If a system exists which will provide the funds neccessary for the purchase of the home, interest free, with no adverse side effects then where’s the problem?

Interest is the cause of deflation. When you don’t account for the outputs of money in circulation, you don’t have the right model in which to figure out circulatory deflation or inflation. For example, I noticed the assumption of more money in circulation in relation to goods and services causes inflation. This is true unless you consider how that money came into existance (with every new wealth being created an equal amount of money is introduced into the economy).

But lets talk about the outflows of money out of circulation to see how circulatory deflation occurs. When you charge interest (setting aside the fact that your defrauding individuals of hundreds of thousands of dollars) where does that money go and to what amount? To the banks of course but think of that vast amount when you multiply thousands of dollars by every loan being made in the economy. This is an enormous sum of money being taken out of circulation. Can banks possibly spend this amount in our economy or do they speculate overseas? We also know banks lend a fraction of this back to the government and have the gall to charge them interest in doing so, who by the way pays the interest on the national debt? The American people in the form of taxes of course.

The point here is interest collected not spent back into the economy is money that depletes circulation thus causing circulatory deflation. There is a second source of circulatory deflation also. When you pay off a home, the principal is retired out of circulation, now you have for example a $200,000 home that has no money in circulation representing its value. This causes further circulatory deflation. By the way, price inflation is the topic of another discussion. Any monetary system has inflows and outflows. This is critical in understanding the big picture.

The time preference of money and charging of interest doesn’t even enter into the equation in the system I’m advocating.

48

Umm, you are not forced. It is possible, though difficult to rent and save simultaneously. The system you described has been artificially manufactured already, and the adverse side effect is that in this system there’s no downward pressure on prices. The risk to the lender is how to get the value out of he home. He can’t just take the home back and destroy it. You’re missing the time preference issues associated with savings and lending. Savings drives productive investment. Savings redirects goods from direct consumption into delayed consumption (investment in production), without the redirection of goods from consumption to production all of our economy would collapse. They’re propping it up right now via the debt bubble, but it’s going to contract, and it’s going to be painful. Please read the links. Production is delayed consumption turned to risky but potentially profitable action.

How much money do you create to correspond with a new screwdriver?

You’ve just described the Ponzi scheme we have, and the cause is fractional reserve banking. What you’ve described is no-reserve banking. What you’re misunderstanding is that the creation of these units results in a lien against some asset. Without some mechanism to allow prices to find the supply/demand equilibrium, which this cannot do, there is no way to do economic calculation. Production falls apart. When this happens all of the liens end up defaulting putting all of the collateral back in the hands of this 0 interest bank you described. So, please explain how this is any different from what we’re seeing now?

Wrong, interest collected under sound money is the profit for saving (forgoing consumption) and investing (engaging in risky productive speculation). It drives savings, which is the only way to engage in production. One must forgo consumption and invest time and resources to convert resources into consumable goods. What you’ve described can’t even get to the point of having interest rates appear, because we have arbitrary pricing appearing from something other than supply and demand.

No you don’t have a $200k home. You have a home that has some value, that is actually a relationship to other goods in the market place. It is not and cannot be an arbitrarily generated number. What you don’t understand is that these prices don’t appear in a vacuum. They are value for value. Not value for random number. Your system doesn’t have a way to generate a price!

Nor do prices. You haven’t accounted for supply and demand, and you haven’t provided value to your accounting units. And until you do this, it’s not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price.

Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest… Future goods are discounted when compared against current goods. Money is no different.

Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it’s relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it’s value be?

Interest fluctuates to move capital. When rates rise, it’s a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It’s a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed.

Stop trying to come up with the uber plan. You can’t fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There’s a long, long history of gold winning. It’s not a fluke.

Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market.

49

But you are not forced to take a loan. The argument you make of being forced into a contract is equivalent (and as ridiculous) as saying that if a shoemaker agrees to give you a pair of shoes if you agree you pay him $60, you are forced into that contract. And there are alternatives. You could save up a larger down payment to negotiate lower interest rates; you could see if a friend or family member would loan you the money at a lower interest rate; you could look to buy a smaller/cheaper house with a smaller principal to negotiate for a smaller interest rate. There are several alternatives available, and there will be more available to those who are willing sacrifice more or are more clever in finding ways to negotiate more agreeable terms.

Is that so? So you mean that with technology that is far more efficient, even more expansive division of labor, and more investment opportunities available to the average man, it is somehow more difficult today to build/buy a house than it used to be? Shoot, that just might mean that some of the most basic ideas of economics are wrong!

As for the rest of your post:

Okay, so let’s say the free market has chosen commodity-backed currency as the dominant medium of indirect exchange. And let’s say you want to build a house that will cost $100,000. That’s 100,000 units of the commodity-backed currency. Are you proposing that a bank should print off $100,000 worth of notes and then give it to you so you can pay someone to build the house? If yes, then realize that those freshly-printed notes you were given by the bank only have value because they look like notes that are backed by commodity. There are now $100,000 worth of notes in circulation that are not backed by anything before the house is built. You have thus, ceteris paribus, devalued all other notes that are backed by commodity. That is, the defrauding that has occurred is upon other commodity-backed currency holders by the bank. This is counterfeiting.

But even after the house is built, at which point it seems you would claim that the $100,000 in circulation is “backed” or “represented” by a new house, this really isn’t the same as a note that is backed by gold, for example. If there were a 100% gold standard of one oz. of gold = $20, this means that the holder of $20 can exchange the note for one ounce of gold, all day, every day, no exceptions. But the $100,000 that is “represented” by your house is a totally different situation. You aren’t obligated to exchange your house for $100,000. Maybe you would only sell for $200,000. Or maybe you refuse to sell it at all. This demonstrates that the $100,000 “represented” by your house is fiat.

Next, let’s think about what a bank does with all the interest they collect. You seem to think there is a good chance that they just plan to pull it out of circulation, forever, because they are evil, or something, because they are greedy and just wish to see their cash balances have more zeroes for no reason, or to build up a pile of gold larger and larger, just to look at it. But if in fact they are greedy and just want more and more, why would they do this? They can earn even more if they invest it. Again, some of the most basic knowledge about economics would have to be thrown out the window if continually engaging in voluntary trade made one poorer. Fortunately, that is just not the case. Thus, if bankers are greedy and want to be richer, they would not let their capital sit idle forever; they would find an investment that they deem as wise and likely to return a profit and engage in voluntary exchange. Something in your opinion of bankers and economics does not mesh.

This is the whole reason banks exist. They serve a purpose that consumers value. They allow some to deposit money and have a chance for a return on their investment in the form of interest, as well as some of the more modern aspects of personal banking like online bill payment, electronic transactions with use of a debit card, etc. Banks also allow others to take out a loan to buy something now instead of waiting some longer amount of time that would be required to save up the cost. You’re mad that they profit in providing these services to consumers? Again, no one is forced to deposit money in banks nor take loans from banks.

Why would anyone (except maybe a family member or friend) take a risk by giving you their savings of there was no financial benefit to them (profit)? You can say, “But if I do not pay the principal back, they will have my house!” But what if they don’t want the house? In fact, if they did want the house, wouldn’t they just not loan you the money and build the house themselves with their own savings, free of risk? Sure, if you defaulted, they would prefer to take the house rather than nothing, but this doesn’t change the fact that by making you the loan, instead of buying the house themselves, they preferred to have the debt paid back according to the terms of the loan.

You act as if deflation is a terrible thing. Of course, distortions in the market are bad, and if distortions cause deflation, it is highly unlikely to be beneficial. However, you seem to be against it wholeheartedly. You don’t want to see the supply of money remain unchanged when a new house is built, for example. But this must also mean you don’t want to see the supply of money remain constant if a new car is built, or another smartphone is assembled, etc. Keep in mind that money is only a medium of indirect exchange. When an exchange occurs, A trades X to B if B trades Y to A. If there the supply of X doubles, it would not be shocking to see that now B will only trade Y to A if A trades 2X to B. This is natural, and we should all be thankful that this is so. But again, you seem to be fighting against a basic fundamental of economics, in this case, the law of supply and demand. And your proposal to combat it is a type of market manipulation (creating money not backed by anything to finance the creation of something).

In fact, it appears to me that there is a bit of Keynesian theory to your proposal. Namely, that spending (or consuming) is and should equal wealth, as opposed to production (and saving).

Now, a society could exist where this is how banks function. But realize that the maintenance of this economic policy requires planning, fiat currency (or else, fraud), and the threat of or use of force to make sure that the plan is followed and that the fiat currency (or fraud) is accepted by the population. So, I’d conclude that this type of society cannot be a free society with a functioning free market, as history demonstrates.

Again, this real issue is not interest; it is moral hazard created and perpetuated by government decree and regulations, fiat currency in tandem with legal tender laws, and a lack of respect for the fundamentals of economics, liberty, and property rights. Your proposal does not address these problems. In fact, it seems to me that your proposal only dresses these problems in different clothing to masquerade as a solution. Of course, though, the clothes don’t make the man.

50

Oh yeah now I remember why I unsubscribed from this thread.

Hey rick, I skimmed through a bit. I can see why a borrower would be interested in a 0% loan, but remind me why anybody would be eager to lend at that rate.

You alternate between taking a haughty lecturer’s attitude one moment, before making statements that betray your lack of understanding (created money can’t have a time preference? Huh?).

I’ll leave you with this quote here, since you said you’ve read some Rothbard:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

51

You mean why would they be eager to make a modest profit? …hmm… maybe to support their families. Sorry, I couldn’t resist. That was a softball ready to be hit out of the park.

I certainly didn’t intend to come off as “haughty”. My only intention is to communicate what I believe is an honest and simple solution that will put the money you earned back into your pocket to enjoy what your entitled to. After all you earned it already! I would think you would be listening very intently to see if this is a viable solution or not. But if you like to throw your money away then I guess that’s your choice.

So with that being said here’s a rather revealing quote.

The study of money, above all other fields, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. – John Kenneth Galbraith

52

P.U. More revealing than your quote is whom you chose to quote.

53

There is no profit to be made, modest or otherwise, by making a loan at 0% interest. There is only risk that you won’t get your money back.

Sorry, I couldn’t resist. That was a wild swing and a miss on a pitch straight down the middle.

Your proposal is a dishonest (or highly ignorant) and complex scheme that will only lead to less trade, lower standards of living, and less overall prosperity.There is no need to put your money back into your pocket to enjoy what you’re entitled to. Since you earned it, you can do what you want with it. Want it to stay “in your pocket?” Don’t take it out of your pocket! Don’t spend it! But you’re not entitled to others’ money in the form of a loan without their consent. If they stipulate you pay them back with interest, you can: 1) agree to those terms or 2) decline. You’re not entitled to have a house right this instant. You may have the privilege to, but only if someone who has saved money (and forgone their own consumption) is willing to give it to you. It just so happens that they’re going to expect you to pay them back, with interest. But they are not, not is anyone else in society, forcing you to go into debt. You can save your money if you’d like and then make your purchase, paid in full.

It appears that several people have read what you propose, and have discerned that it is NOT a viable solution. It will have unintended consequences (you obviously don’t realize that, though), and will result in, as I said, less trade, lower standards of living, and less overall prosperity. There’s just no incentive to make loans, no way to determine prices, and no room for liberty or property rights, as the only way people will engage in your plan is if a government coerced them to. Until you can refute the law of supply and demand, the function and value of prices and profits, or the fact that only production (and not spending) increases wealth, your proposal has LITERALLY no grounding in economics. While you’re at it, maybe you can refute Human Action (Mises), as it would seem necessary as well for your proposal to have the slightest chance of working out like you think it will.

It turns out that the truth has evaded you, as the complexity of your idea has blinded you and disguised fallacy as solution.

54

@Stephen

Right!? A Keynesian! A reformer who looked favorably on public spending (financed through taxation, of course), so much that, perhaps, he was more of an activist than an economist. Here’s another quote from him, which of course, if completely backwards:

“Under capitalism, man exploits man. Under communism, it’s just the opposite.”

In case you were wondering, Rick, under capitalism, man serves man. In fact, the most successful are those that serve the most men to the highest level. Under communism, or socialism, or fascism, or democracy, or any form of collectivism, man exploits man. It’s the whole idea: some part of society lives at the expense of the productive members of society. It is exactly like parasitism, where the parasite cares not for the well-being of the host, but merely will look for a new host once the previous one has been completely drained of energy. And no, the current system in America is NOT capitalism. It is a form of collectivism; call it corporatism.

55

Phi, did you misunderstand the quote you posted? I’m pretty sure it’s meant to be a joke - the implication being that if you switch the subject and object of the sentence ‘man exploiting man’, you end up with ‘man exploiting man’: the same thing. Of course, I disagree with his assessment of capitalism…

56

I guess I did. Haha I do admit I was confused, but I chalked it up to a central-planner’s odd form of logic and language. Ultimately I decided he must have meant opposite as the opposite verb, implying that the opposite of ‘man exploits man’ is ‘man serves man.’ My apologies on that, and thankful for pointing that out, Aristippus.

57

Yeah I admit that’s a pretty good line by Galbraith, but that doesn’t change the fact that he was the Paul Krugman of the '60s.

58

How much money do you create to correspond with a new screwdriver?

You don’t create any money as the buyer has the necessary funds to purchase it directly.

You’ve just described the Ponzi scheme we have, and the cause is fractional reserve banking. What you’ve described is no-reserve banking. What you’re misunderstanding is that the creation of these units results in a lien against some asset. Without some mechanism to allow prices to find the supply/demand equilibrium, which this cannot do, there is no way to do economic calculation. Production falls apart. When this happens all of the liens end up defaulting putting all of the collateral back in the hands of this 0 interest bank you described. So, please explain how this is any different from what we’re seeing now?

I agree you need collateral to back up a default on a promissory obligation but here’s the strength of this system

  1. A promissory note is issued by the lender. It is his and not the property of any institution.
  2. A common monetary foundation (a non-profit organization) takes the place of banks. Its sole purpose is to determine credit worthiness, the ability of the buyer to afford the asset, to issue money interest free to the seller, and to retire the monthly payments from the buyer back out of circulation at the rate of depreciation.
  3. What this does then is at any given time throughout the duration of the obligation, the money in circulation equals the market value of the asset which equals the remaining amount due to be paid by the buyer. If at any time a default occurs the buyer has broken his promise and loses the asset but it can be sold for what it’s worth and retired out of circulation. The new buyer repeats this same process. No inflation or deflation.

Supply and demand is determined by buyers and sellers. The seller sells to the buyer willing to pay the highest price. The buyer shops around to buy at the lowest price. What does charging interest have to do with this? Interest will slow economic growth by taking away money from people who would have otherwise spent it into the economy, creating job growth and more wealth. Economic calculation is more accurate under this proposed system because no deflation or inflation exists!

No you don’t have a $200k home. You have a home that has some value, that is actually a relationship to other goods in the market place. It is not and cannot be an arbitrarily generated number. What you don’t understand is that these prices don’t appear in a vacuum. They are value for value. Not value for random number. Your system doesn’t have a way to generate a price!

The definition of deflation and inflation is the amount of money in circulation in reference to goods and services. Deflation occurs when there’s too little. Inflation occurs when there’s too much. How can you disagree with this? Obviously the $200,000 I used was an example. I don’t know what the price would be.

Nor do prices. You haven’t accounted for supply and demand, and you haven’t provided value to your accounting units. And until you do this, it’s not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price.

Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest… Future goods are discounted when compared against current goods. Money is no different.

Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it’s relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it’s value be?

Interest fluctuates to move capital. When rates rise, it’s a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It’s a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed.

Stop trying to come up with the uber plan. You can’t fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There’s a long, long history of gold winning. It’s not a fluke.

Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market.

I’ve listened to about ½ of the Rothbard discussion.

This is a long post and it’s hard to keep up with you guys.

The first point is that money is never created out of thin air. It’s always backed by a promissory obligation to give up ones labor and production over a period of time.

This system does have value. Are you saying real goods have no value?

Why do you have to have interest to send a signal to increase or decrease production? Simple supply and demand sends this signal in the form of price fluctuations. If products become more expensive then that sends a signal to business to get moving and make profits.

59

There is no profit to be made, modest or otherwise, by making a loan at 0% interest. There is only risk that you won’t get your money back

Have you not understood that there is no risk involved here? How can there be risk when at any given time the asset is worth what is owed on it? The cost to implement this is “fee based”. Not some compound interest exponential function nonsense someone pulled out of the air.

60

Wait, come back you can’t gloss this over. I asked what the producer sells it for. If large goods get money created as a claim against them then all goods large or small have money created. I’m asking you how many units of this lien based currency do you create for my screwdriver?

Wait, you can’t move on so quickly. A default on a promissory obligation? So, what obligation was incurred by creating the promissory note? When a bank issues a promissory not, they also give me something of value, traditionally it was gold. Currently it’s a trust-backed fiat paper money. I can exchange that money for goods. But how large is the obligation? No one wants to own 1/200,000th of my house. It doesn’t have any use.

Then where is the obligation? Under normal loans the bank bears the risk of default. In this case? Each person I spend a unit of this currency has a portion of an obligation, instead of value. I think your point is that at least something would back the money even if it was just a portion of an obligation, which the current system doesn’t seem to cover. But you’ve already dodged the price setting function.

Ok, you miss the role interest has in driving savings and investment. That time preference means future goods are not as valuable now as they will be. The exchange of something now for the same thing in the future is an exchange of two different goods. Interest merely tells you what current supply and demand in the market set the price of that difference in value. If we were to generate a price table the bottom line is that you are comparing dollars today with dollars tomorrow. If the interest rate is 8%, then 1$ now is = $1.08 next year on this date. That’s a price difference between two DIFFERENT goods.

I disagree wtih this. How? Because it’s inaccurate. Inflation and deflation are a money supply issue. Not too much or too little, but less or more. “Too much” is the adjective used by someone who doesn’t like rising prices and vice versa. What’s ignored is that the changes in prices with a stable money supply are caused by changes in supply and demand of the underlying goods. We all want more money to do more stuff. And unfortunately with governments printing fiat money, that’s what happens. Some people vote themselves more money.

Money will always be competing for goods (actively engaged in setting prices by exchanging hands for goods) or sitting on the sidelines waiting for prices which motivate the holder of money to trade it for current goods and services instead of holding it in order to purchase future goods and services.

No, I’m saying that prices are ratios of values not values. In your system there is nothing on the other side of the ratio, and in order to do exchage you end up establishing a ratio.

So how many claims to a screwdriver get exchanged for a claim on the house above? Meaning what’s the unit of account?

How do prices get established in your system such that products can become “more expensive”. More expensive means a rise in prices. How do those prices rise in your system of liens against property?

Interest explains the difference in the subjective value between present goods (including labor and land) and future goods (including labor and land) between two different actors. When I build a house, I’ve stored up money as a substitute for generating all of the goods necessary to build the house and instead storing them.

Go back and look at Crusoe level production. Eating a roasted chicken involves production to get to that point. All of these efforts go into creating the consumer good.

  1. Find chicken

  2. Kill chicken

  3. Strip feathers

  4. Remove the guts

  5. Build a fire

  6. Cook the chicken

Each takes time and effort to produce the consumer good, “chicken ready to be eaten”.

Each step along the way is an investment of time and resources. It’s production. Each step delays current consumption in order to produce a good I prefer to that current consumption.

  1. Could’ve picked berries off a bush or larva off the ground and put them in my mouth.

  2. Pick and eat berries while watching the chicken run around.

  3. Eat raw chicken and feathers and guts

  4. Eat raw chicken and guts

  5. Eat raw chicken

  6. Eat raw chicken while getting warm by the fire…

Each step is investment in a productive effort. At each step, I prefer the future good (cooked chicken) to the present consumption option.

It is this preference of a future good to the current good, which explains production. You cannot wipe this out. Austrian Economics (praxeology) makes the logical claim that all other things being equal, a current good has a higher value than the same good at some future time. The rate of interest tells us what that difference in value is. If you don’t include this, interest becomes confusing. But as soon as you do include this difference in time preference things make sense.

  1. Finite prices for land

  2. Asset prices

  3. Rent

  4. Wages