Exactly. Seen vs. unseen. Just imagine how much poorer society is as a result of the wealth destruction and misallocation caused by such a massive devaluation over the time period. It’s staggering and incalculable. Maybe someone much more knowledgeable than me can expand on this idea, cause I’ve often wondered just how much wealth was destroyed, and how much wealthier society overall would be had this not taken place.
Would that point be a step in the right direction to answering the O.P.?
The false dichotomy I’m talking of is the one where people say or imply that our choices are between having the Federal Reserve/fiat money/inflation OR what we had before the Fed and it’s fiat money began the its inflationary monetary policies. I don’t believe you’ve said that type of thing explicitly, but I think it’s implied when you ask what’s the harm in prices that have gone up, even a lot, over any given time frame as long as wages have gone up even more. Many continue on from that point with something like, "Would you rather live in 1900 with a strong dollar, low prices but even lower wages, or now with higher prices but higher wages, with a much higher standard of living including airconditioned homes, central heat, automobiles and the modern medical advances?
I call that a false dichotomy because it presupposes that inflation was necessary for those advances in efficiency and standard of living. I think that is a decidedly false premise.
You asked about whether a commodity based money could allow similar capital savings as the present system, capital formation that was necessary to fund the research and investment necessary to bring about many of the advances which allowed our increasing standard of living. I think the answer to that question is definitely YES. In fact, I think the advances would have come faster and the standard of living would have advanced further and more steadily than the boom and bust cycles engendered by artificially low interest rates financed by artificially created money which is the root cause of that inflation.
I think we can see the gross waste of time and capital in our current economic crisis. The poster child for that malinvestment must be Dubai which was on a phenomenal building boom. They built many man made islands and 6 star hotels. They were dubbed “6 star” because they were significantly more luxurious than the old “5 star” gold standard for luxury. They even built a mall with an indoor mountain complete with snow making machines so people in Dubai, a desert region, could ski.
That type of development was enabled by the boom cycle in the world economy as banks from around the world lent them billions of dollars on this truly unsustainable development. Then the world market crashed. The cheap and easy money was suddenly cut off. Similary, the over consumption of the boom economy, in this case wealthy people coming to Dubai for the novelty of it all, came to a grinding halt as well.
Suddenly they couldn’t pay their burgeoning debt. They’ve defaulted on their loans and numerous projects have been halted midway through construction. There are partially completed skyscrapers and caterpillars and other heavy equipment sitting idle amid projects that have been started but will never be completed. People who were foolish enough to pay exorbitant prices for luxury condos on those man made islands are now holding the bag on properties worth pennies on the dollar. In some of them the government isn’t able to continue providing adequate sewage treatment, and garbage and sewage floats up on the luxury beaches they paid hundreds of thousands to millions of dollars for access to. There are partially completed projects all around them as a living testament to the malinvestment they participated in.
A similar phenomenon happened in Las Vegas. Luxury hotels were going up all over the place and many have halted mid-process. People who put money down for luxury rooms are suing to get their money back. People who have already taken possession of their property are walking away from them and defaulting on their loans as their homes/condos have plummeted in price. Developers and builders are going bankrupt all over the place.
Similar stories, though perhaps not quite as dramatic are going on all over the country. Mall owners are going bankrupt in many cities, as are builders and commercial real estate companies. Banks, of course, are the ones who have dominated the headlines with the federal government having bailed out and taken over many of our largest financial institutions and propping up all of the others in an effort to prevent an even more devastating financial collapse.
How could anyone figure that to be any more efficient or a better process than a slower but sustainable and balanced growth?
I think it is a bit ironic to speak of that as we are currently in what may be an historic bust of that boom cycle. It would be interesting if we were able to peek in on a couple discussing their finances during a monstrous credit boom of their own. I could imagine a wife asking her husband if they weren’t overdoing things and setting themselves up for disaster by all of the debt they have been taking on and the fact that they seem to be living way above their means. She might point out that several years ago they had no debt, but now owed $250,000 on a newer bigger home, $40,000 on newer cars, and another $35,000 in credit card debt and by her reckoning were spending some 15% more this year than their income.
He might reply that she was being quite silly. Weren’t they all happier now in the bigger home in a better neighborhood? Didn’t the kids love Disneyland? Didn’t the family all seem more content and get along better since they installed the new home theater system, and the pool? Didn’t she like her new car, and the new jewelry she was wearing to the big parties they were attending as a part of the new job he had landed? Would she really want to go back to their old lifestyle? If he kept getting raises and promotions they should be able to afford it all.
If that were the end of the story, one might conclude that the man made a lot of sense. But what if the wife was correct, that this boom period in their lives was unsustainable? What if we moved further along the timeline of their lives… would we find that they came to the fate similar to those we see on the documentaries or read in the papers and magazines? What if he lost his job, or had to take a pay cut? What if he even kept his job, but the credit card company decided to raise their interest rates or worse yet, cut off their credit line completely in a market downturn? What if their balloon note came due and they couldn’t refinance it again?
If they were thrown out of their dream home would they really be any better off than if they had stayed in their smaller home without a house payment? Once again, people might come to different conclusions at different points in time.
For what it’s worth, I agree that not all false claims or even deliberate lies are false dichotomies. I don’t think I ever made such a claim, however. As to the babies pulled from incubators by Iraqi commandos, that does sound like an unconscionable lie, but I don’t see the relevance to the topic at hand.
I’m no historian, but I think there is quite a bit of such evidence. From what I’ve read, the U.S. was having much better growth than Europe during the time they had central banks and we didn’t. In fact, I’ve read that the clear, perhaps even inevitable pattern for fiat currencies has been that they eventually return to their inherent value – near zero. There are many examples of countries that have inflated their way from prosperity to destitution.
Our own central bank, the Federal Reserve, is actually a cartel of private banks that has control over our nation’s money supply. They can skim money off the economy undetected pretty much at will. How can that possibly be a good thing? Since the Federal Reserve has come into existence we have had multiple boom and bust cycles and quite a few depressions &/or recessions, and the value of the dollar has dropped to 5% of its original value. I think the burden of proof should really be on those who think this somehow gives us a better standard of living.
Just pointing to the fact that our standard of living is higher now than it was 100 years or so ago doesn’t really cut it, however. Humans have generally improved upon their standard of living over time and just because that has continued over the last 38 years or so that we have been off the gold standard doesn’t prove anything. That is especially true given our current environment where our government debt is more than 800% of our gross domestic product, and our total debt, including such “off budget” items as social security, medicare and the medicare prescription drugs program, is more than a $1 million dollars per taxpayer and the deficit is growing at an exponential rate. If our government were a corporation it would be considered bankrupt. It would seem to me that we are much like a family that is enjoying a booming lifestyle but is just now coming to grips with the fact that they are actually bankrupt and are facing a future with a much diminished standard of living.
I have not seen anyone address this point. I have the same question. It would seem to me to be pretty irrelevant to me as well, for the most part. If something that cost 5 cents is now a dollar, but I have 20 times as much wealth, then how exactly has the currency fallen 95%? I think it is a misleading statistic, and will turn people off to Austrian economics if the person tossing out the statistic claims to have studied Austrian economics.
its important because money is not neutral and therefore the inflation that the statistic represents dissipates wealth and disincentives savings.
What do you mean by it dissipates wealth? Are you just talking about the fact that the people that get the new money first benefit on the backs of those that get it last? Well just throwing out “the currency has been devalued by 95%” does not convey that to most people, I would conjecture. Most people, I would imagine, are smart enough to go to his or her self, “yeah, but today we have a lot more than they did a hundred years ago, so why is that statistic relevant?” Again, to throw out that statistic, I think, just makes one look foolish.
How does it discourage savings? If inflation is 2%, and I can make a 15% interest rate, I would still be making 13%.
double post
Got junk bonds? Just kidding.
We had years of double digit inflation several decades ago and the people who had their life savings in a savings account, or savings bonds and CDs were losing value every year were seeing the savings they had accumulated by years of hard work and saving drop in value every year. For instance, if they had a 10 year CD that was paying 3% or 4%, but the inflation rate was going up by 12% or 14% or more they were losing the value of their accumulated wealth rapidly. To make matters worse, they had to pay taxes on their “gains”. To add insult to injury, many were even pushed into higher tax brackets even if their income was growing slower than the inflation rate. Those were the years of the “malaise” that Jimmy Carter spoke of.
I think you are missing a critical part of the argument. They aren’t saying “We’re worse off today than we were 50 or 100 years ago.” They’re saying that inflation robs us of wealth and is counter productive to society. There’s a big difference. Saying that because inflation and an increasing standard of living happened together necessarily “proves” that inflation is not harmful to the economy or the people in it is a logical fallacy.
For instance, what if a man began drinking at age 21. Over time his standard of living began to improve. He went from a job as a stock clerk up into a supervisory one, and finally into a managerial position. He bought a home, moved from his apartment and got married. His income more than doubled. But in the meantime, he had become an alcoholic. Because of that he occasionally missed days of work and other times didn’t do as well because he was hung over. He also was having marital problems which were becoming increasingly severe.
Would it be logical to say that because his standard of living had gone up over the same period of time that he was drinking heavily, that heavy drinking was causing him no problems? Would you think that someone arguing that he should quit drinking given his increasing standard of living “just makes one look foolish?”
But you are assuming that inflation and interest rates are constant and in a very profitable ratio in the savers’ favor. But that is not really a valid assumption. Both inflation and interest rates fluctuate, and do so largely because of the changing monetary policy of the Federal Reserve, Unfortunately, this adds a large element of uncertainty and risk to the equation.
Many companies and individuals have been badly burned because of those fluctuations. We had a major financial crisis during the Reagan administration when the Savings and Loans were going bankrupt left and right because interest rates shot through the roof when the Fed suddenly switched course and decided to try and bring the roaring inflation rate under control because of the damage it was doing to the economy.
The S&Ls had loaned their money out at long term fixed rates on mortgages but the interest they were having to pay their depositors was suddenly skyrocketing. If they loaned money out to homeowners who were repaying it with a 4% or 5% interest “profit”, but the S&Ls were having to pay depositors 10% on their savings, it obviously wouldn’t take very long for them to get in serious trouble. And that is exactly what happened.
Prior to that, however, the savers were getting burned. They were getting 2% & 3% on their deposits, but their cost of living was going up by 10% or 12% every year. The value of their savings was dropping very rapidly.
That see-sawing back and forth has caused massive losses for some people and has caused individuals and companies to go bankrupt.
That additional risk has a tendency to discourage savings in and of itself. Right now, for instance, I wouldn’t consider buying long term bonds. I think the inflation rate is likely to go much higher. If that were to happen any money that I received back would be worth less than what I gave up now. Why put off current consumption for future consumption if I could perhaps get more for my savings now than I could then?
I also think interest rates will go up. When interest rates go up, the value of existing bonds and other debt instruments go down. If I had a 30 year bond that paid 4%, why would anyone want to buy it from me if they could get a new one that paid 10%. I would have to discount my price (and take a loss) until the effective interest rate of the bond I was selling was equivalent of what they could get on the current market.
In fact, tThe reason the interest rates go up in an inflationary environment, is precisely because it discourages savings and they have to raise rates higher to attract investors.
Just for clarification, I made those statements, not nirgrahamUK.
And you don’t think the lay person makes those fallacies in his head? And inflation is not in and of itself harmful to the economy. Even in a free market, there would still be inflation and deflation.
I never made such an argument. But the lay person does all the time, since the lay person probably does not understand logical fallacies.
No, I did not assume anything. I qualified my statement by saying that if interest rates are 2% and I am making a 15% return, then I am still making 13%. Given those are true, the statement is true.
So did the dollar “lost” 95% of its purchasing power or only 10%? It goes back to my original question. Where does the 95% come from? If it is the price of goods, then does it take into account increased wages? If not, then the statistic is irrelevant. And since our standard of living has gone up, most people will assume the statistic is bunk.
“They aren’t saying “We’re worse off today than we were 50 or 100 years ago.” They’re saying that inflation robs us of wealth and is counter productive to society. There’s a big difference. Saying that because inflation and an increasing standard of living happened together necessarily “proves” that inflation is not harmful to the economy or the people in it is a logical fallacy.”
i i have only heard a lew rockwell voice say that people are worse off.
unless you can show that the current mode of money inflation is harmful it seems there is improvement with a the current monetary inflation scheme…the proof is in the pudding.
by worse off, i took to mean not a alcohol problem or social ill, but prices of goods.
“If not, then the statistic is irrelevant. And since our standard of living has gone up, most people will assume the statistic is bunk.”
if its bunk and there have been several prominent people repeating the bunk several times then that tells me (lew crockwell, ron paul, others) they are incompetent and are liars.
i curse both of them.
if there is data somewhere showing where less central banking/frb leads to greater economic miscalulations than a system tending toward gold/silver and fully backd reserves i would be interested in seeing it.
if not, many of the operators at lrc and mises should have their asses kicked and be exposed as liars.
if there is data somewhere showing where less central banking/frb leads to greater economic miscalulations…\additionally.
because i have had govt officials deceive me to rrather extreme levels (former head of cia turned president duped by a republican pr firm in to repeating babies torn from incubator s lies, for one)
i will never trust their money system as being optimal or as wealth producing as a gold/silver operating fully backed, but it seems that competitive markets have been able to drive prices down amidst inflated fiat currency.
sthomper is largely correct. The “decline of purchasing power” since the creation of the Fed is mostly irrelevant. Yes, there is an inflation tax but in modern economies it is relatively insignificant, due in part to the frational nature of banks. As long as incomes rise with inflation and interest rates reflect an inflation premium (which they do), there is little problem. If inflation rates are volatile there can be calculation difficulties and that can affect savings, but we havn’t had that for 20 years.
I also think that he is correct in saying that some of the people at the Mises Institute and LRC are dishonest with their readers. I realize that is a strong statement and I don’t mean to say everyone is, but it’s there. Lew Rockwell and Ron Paul are pushing a political movement so they almost have to.
For example, under certain circumstances deflation can have catastophic effects. Everyone at the Mises Institute knows this but many articles will gloss over it or ignore it entirely. It goes against the anti-Fed message they have created.
“New wage data indicates what you might have suspected. Average wages are not keeping up with the cost of living. This has given rise to claims that we live in the first sustained period of economic growth that has failed to offer a similarly long increase in real wages. Indeed, wages have declined in real terms by 2 percent in the last three years.”
http://www.lewrockwell.com/rockwell/worse-off.html
here the rockwell from a 2006 article, using govt statistics i assume, mentions declining wages.
if its true i dont know.
also, what i would be interested in knowing is if gold and silver, even though mandated as government money, would be less prone to govt determinations of making new money and left more to market risk and mining investment.
letting the frb banks try their own luck at frb-ing (to the extent that is occurs) and teh fully backed gold/silver operate as well…if this scenario would produce greater wealth than the current system with out the real wage declines (if true) that are spoken of in the above link.
i beleive that such data doesnt exist.
Sthomper,
Isn’t it true that the people who are really hurt by inflation are the people who have a lot of money saved?
I mean, the average worker, whose wages presumably move up with inflation, isn’t going to care as much as the person with a little wealth stashed away.
Doesn’t inflation have a greater negative effect on savers than anyone else?
I’m not trying to disprove anything you’ve said here, I’m just asking for your thoughts on this.
Yes, I know. The quotes are sometimes nested within one another, and I was quoting you who had quoted nirgrahamUK and was responding to him. They have boxes around the quotes to try and help us keep them straight, but it can be a little tricky at times.
Sure. But that is why I was responding. People can sometimes change their minds if they see evidence to indicate where they might have gone off the track a bit. I always try to be open to that possibility myself, and hopefully can change my opinions when called for.
This is where we part company. I think inflation is harmful to the economy in and of itself. I believe I mentioned in this thread some of the ways that is true, but here are a couple that I can think of off the top of my head.
People spend precious time and resources in compensating for or adjusting to the reality of inflation. I noted somewhere that my father used to spend a good amount of his time explaining to customers why prices were rising all of the time. Not only was his time wasted, but so was the time of the customers who spent an equal amount of time trying to understand the situation.
People waste precious time and resources in renegotiating contracts and labor agreements. When inflation was raging here, we had a lot of labor strife as the cost of living was going up rapidly and unions wanted to renegotiate their labor agreements. This often ended up in much strife between management and labor and strikes often ensued. This was repeated throughout the economy and disrupts things unnecessarily. Even if General Motors, for instance, eventually came to terms with their union, they might get shut down if the union for a key supplier went on strike. Then if the truckers went on strike, it would disrupt things across virtually all industries.
Precious time and labor is spent in repricing things and figuring out what prices should be used. If a store bought a shipment of an item and then a week later the prices on that item went up substantially, should they raise their prices immediately, because their cost to replace those items went up? Or should they wait until they sell out that batch and reprice it as the new batch comes on line? If so, were is the cutoff point if they keep getting new shipments all the time?
I read that when Argentina was going through their hyper inflationary episode that they finally quit pricing things on the shelves because they had to reprice things so rapidly. In fact, when inflation was the worst there, the prices often changed from the time the customer picked up and item and the time it was checked out at the counter. People would stop at the nearest store on their way home from work on payday and start buying as much as they could. The currency was devaluing so fast that they would lose a lot of value on the way home.
I had a cousin who lived in Brasil when they had pretty high inflation and her husband said that people would convert their money as soon as possible and purchase US$ or gold and put it in a safe as soon as they were paid for the same reason. Their own currency was dropping rapidly in value.
Well goodness, one can make virtually any statement true if they presume their premises are correct. For instance, I could say that I could spit in someone’s face without causing a fight if the person wouldn’t fight back.
Your original statement, in the context of arguing against the statement that inflation discourages savings:
“How does it discourage savings? If inflation is 2%, and I can make a 15% interest rate, I would still be making 13%.”
The problem is that your presumption is almost never true in real life. Our current inflation rate is about 2% (if you believe our government statistics), but interest rates are near 0%, for instance.
I think virtually any economist will agree with the original poster’s premise that inflation discourages savings.
It is usually an average of some basket of goods that is compared over time.
No
I disagree. When we had a stable money as a unit of measurement, prices often dropped when new breakthroughs in technology or methods of production enable more to be produced with the same time and effort. Wages relative to prices were going up. In fact, the United States economy was growing faster when it had no central banking system and no fiat money relative to Europe which had central banks to "manage their economies. Even if they were growing, it was slower than ours was.
But they would be wrong. Our government has had waste, mismanagement and incompetent people for decades and yet our wages and standard of living have grown throughout that period. Does that mean arguments against waste, mismanagement and incompetence are bunk?
Although I think it’s a true statement, saying “95% of the value of the dollar has been destroyed by the Fed” is not totally scientific.
Even for a single person, it is impossible to compare the subjective value of $1 for different periods of time. For example, a person born into a rich family in 1913 might not have cared about an extra $1, but if they are destitute in 2010, it could help fill their stomachs. Even the objective exchange value of $1 cannot be compared: a Renoir painting worth $1,000,000 today might have been only $50 in 1913, but a $1000 computer today could not have been purchased for even $1,000,000 in 1913.
I think the only way to come up with the 95% figure is to assume a “basket” of goods and look at objective exchange value. This is how CPI works, but as was shown by John Williams, the official government-reported CPI has been fudged for political reasons over the decades and can hardly be trusted. For example, when a consumer is forced to start eat hamburger because he can no longer afford steak, the CPI does not increase much.
IMHO the best “basket” of goods to use is gold, as its qualities make it an ideal commodity money. Gold was $19/Oz in 1913, so based on that, we see about 98% of the value of the dollar destroyed. Someone who bought an inert, non-interest-bearing lump of gold in 1913 would now have 50x as much wealth as someone who just the kept cash under their matress that whole time.
Incomes don’t rise with inflation. They rise after inflation. Some later then others. Some much later then others like all those on fixed incomes.
Because I suppose the biggest bubble in the history of central banking has nothing to do with inflation and economic calculation.
I’ve never been to LRC as far as I know, and I’ve only been on here for a very short time so I can’t speak to whether anyone is being dishonest with their readers, but I haven’t seen it so far. In any event, I think you are undervaluing the problems with inflation and a central bank that has complete control over the money supply and can in fact create it out of thin air at will.
Since they’ve come into existence we’ve had many boom and bust cycles, including the Great Depression, not to mention our current “Great Recession” which may well turn into another Great Depression or worse yet, a Great Collapse of our financial system.
Look at the debt they’ve enabled: www.usdebtclock.org/
A few days ago I added up the official national debt plus the so-called “off the books” unfunded liabilities of Social Security, Medicare and the Prescription Drug program and it came to the whopping total of $1,092,789 per taxpayer! We added $14,775 per taxpayer last year to the total and the government which typically underestimates future deficits has already predicted trillion dollar deficits as far as the eye can see.
As Chris Martenson notes on his page, How Much is a Trillion Dollars?, in his Crash Course:
A million dollars is a stack of $1,000 bills 4" high.
A billion dollars is a stack of $1,000 bills 358 feet high.
A trillion dollars is a stack of $1,000 bills 67.9 miles high! It would reach into the outer atmosphere.
Check out the video - you have to scroll down a little bit.
Only in the sense that no one is omniscient and as such there will always be inefficiencies in the market. My point is, even in a free market, you will have inflation and deflation with whatever currency is chosen, with all four of the problems you listed. Because the number of people changes and the supply of the currency will change. Even in a free market some people will get the benefits of inflation before others. Big deal, it is how the market works. But in a free market, the effects of inflation and deflation will probably be so insignificant, that it will not matter.
Conjecture.
Appeal to authority and majority. Irrelevant.
But it does not account for wages, which is what my point is.
Of course they would be wrong. So what?