Need help answering this comment from a friend(have fun blowing holes in this one)

Economics Economics Questions
1

I’m been attempting to enlighten friends and family and while I’ve learned volumes about the Austrian School I can’t always come up with the answers or articulate them.

Having said that I know the response below from a friend of mine is absolutely incorrect. I’m looking for a good response to send back to him. Thanks!

Below is my email to him and his response(mine in italics and his in blue):

Either way this increase in the money supply dilutes the remaining money. The people who have access to it first get the full advantage of the money’s purchasing power, those who get it last have more money than they used to but can actually purchase less than they would have before.

A simple example of this would be to imagine trading baseball cards. If you had the ability to print(counterfeit) as many Babe Ruth rookie cards as you wanted you would, or let’s assume you would since our government would. You could sell those for a heck of a profit, for a while. Then you’d have to print 1,000 Babe Ruth rookie cards to net as much money as selling the first 10 got you, and so on. They wouldn’t be as scarce anymore, which is an essential element of money.

Now in this scenario you would always fare OK because you could always print more. But the people who were further down the totem pole would get screwed. Think about the guy who owned a couple Babe Ruth rookie cards and woke up 10 years later and realized there were 10,000 cards in circulation. His ‘savings’ would be worth nothing relative to what it used to be worth.

I was referring to how you believe that inflation is a form of counterfeiting money. Inflation is healthy (if properly controlled) and allows for growth in some instances. Without inflation prices would stagnate and there would be less opportunity to create new capital unless the lending institutions stretch themselves even thinner than they already are.

For the most part I understood what you were talking about – didn’t completely agree with it all though. I’ll have to go back and reread it b/c I didn’t have time to really get into it since this week has been crazy.

It was a good example with the Babe Ruth rookie card, but that scenario assumes that there are not more people to take on the Babe Ruth rookie cards and they would only saturate a market of a finite size with zero growth. I understand what you are getting at by the gov’t printing more money which makes it less scarce but that is not counterfeiting – it’s legal. I’ll reread it later today and get back with cha.

2

Your friend confuses inflation with interest rates, and equates that more money = lower interest rates. Interest rates are controlled like any other price, by supply and demand. Inflation is the phenomena of more money. The printing press is merely used to subsidize interest rates. Why are stagnating prices bad? Your friend does not give justification for this. Anyways, having prices go down (because more can be produced) is actually a good sign.

It is perfectly fine to print more dollar bills but it is wrong to use coercion to force others to use them in their transactions. Also, ask your friend, who defines the laws?

3

Thanks for the response. I’m not sure why he thought ‘stagnating prices’ were a problem.

I think he might be thinking that you have to increase the money supply to allow for an increase in population growth.

I’ve never quite figured out the response to that. I’ve always heard people say you never have to increase the supply of money once the money is established and accepted.

But never an explanation?

4

Well, he might but he’d be holding a position that was over two hundred years ago by Hume. Any amount of money can do the job, prices merely need the freedom to correct themselves.

5

That’s because we’re conditioned to think in terms of dollars. A penny isn’t divisible - an ounce of gold is - infinitely.

In a gold economy, as the total of goods and services in an economy increase faster than the supply of gold, prices necessarily fall. (and, incidentally, it gets easier to cart around the same purchasing power worth of gold/silver) The simple passage of time yields a real wage increases - no “raise” necessary. Now what’s left to consider is trade imbalances. If we export more than we import, gold flows into the country keeping prices high and decreasing our competitive advantage - this would tend to push us towards balance. If we import more than we export, then gold flows out of the country. less gold chasing more goods causes our prices to fall and we become more competitive - again, tending towards balance.

This is why china strictly controls its currency pegged to the dollar so that this equilibrium is never reached - as people in the US are buying from china, they must exchange dollars for RMB - increased demand for RMB, decreased demand for dollars. Ordinarily this would cause the value of RMB to increase on a the market, and fewer RMB would be exchanged for a dollar. More expensive RMB mean less of a trade advantage.

If it wasn’t illegal and contracts denominated in gold weren’t unenforceable, there would be little demand for a currency that can be printed willy-nilly and whose value decreases every year.

Correct me if I’m wrong.

6

Inflation is healthy (if properly controlled)

Why?

and allows for growth in some instances.

“Growth”, as in, increasing the real output of consumption goods per period of time, is only possible by investing in more capital goods. This action is “allowed” even in a moneyless economy. Thus, it does not become more or less “allowed” as the stock of money fluctuates.

Without inflation prices would stagnate

Not necessarily. Prices (of consumption goods) would fall if there was growth, and rise if there was dissaving. They would “stagnate”, as in, remain unchanged, only if the consumption to investment ratio stayed the same all the time.

and there would be less opportunity to create new capital unless the lending institutions stretch themselves even thinner than they already are.

There would be less opportunity to create money-capital, but not capital goods. The creation of capital goods is available to anyone who has the willingness to spend time doing so, and access to previous savings to sustain himself in the time period it takes for him to complete and sell these goods. Again, this action is possible even in a moneyless economy, and thus, the stock of money does not create any more or less “opportunity” to perform it.

For the most part I understood what you were talking about – didn’t completely agree with it all though. I’ll have to go back and reread it b/c I didn’t have time to really get into it since this week has been crazy.

It was a good example with the Babe Ruth rookie card, but that scenario assumes that there are not more people to take on the Babe Ruth rookie cards and they would only saturate a market of a finite size with zero growth.

Even if the total number of people is larger, those that got the cards first would still have an advantage over those who got them last, so your argument still stands.

It is true that in a situation of “growth”, (which I am interpreting as an increase in the amount of consumption goods per period of time due to saving), there is a tendency for prices of consumption goods to fall. But a situation with growth would still have lower prices had the amount of money stayed constant than a situation with growth had the amount of money increased. Thus our analysis has not changed.

We must be careful to compare only situations that are equal in circumstances. We can not compare a situation with a constant money supply and no growth to a situation with an increase in money supply and with growth. Or we can, but this does not allow us to say anything about whether the resulting change in prices is because of the change in the amount of money, because of growth, or both.

This is why economists like to use what is called the ceteris paribus assumption. This translates to “all else equal” and means that all the variables which we are not examining are assumed to be unchanged. This allows them to isolate what is the nature of the one specific causal relationship they are interested in. In our example, the causal relationship between the amount of money and the prices of other goods, which is a positive one.

I understand what you are getting at by the gov’t printing more money which makes it less scarce but that is not counterfeiting – it’s legal. I’ll reread it later today and get back with cha.

It may not classify as counterfeiting in legal terms, but the economic effects are the same, and so it would not be strange to believe that the motivation is the same.

7

Great, thanks for all the explanations!

8

Killing innocent civilians is also ‘legal’ for some folks empowered by the government.