“One of the cornerstones to Austrian theory is that inflation does not occur instanteneously nor simultaneously, and this is a major reason why Austrians reject the use of the mechanistic quantity theory of money.”
Would you mind explaining which quantity theory money the Austrians do accept? Or the proper terminology. I was under the impression that Austrians do accept it.
Also, if the cornerstone is that inflation does not occur instantaneously nor sumultaneously, then by corollary, deflation does not occur instantaneously nor simultaneously?
“I don’t see why this would cause a business cycle, but if new gold is introduced by account of artificial stimulation then I don’t see why it wouldn’t.”
Can you provide an example of how gold can be introduced by artificial stimulation?
“Would you say that in a free society, where gold was money, that a large discovery of gold would cause inflation?”
If the answer to this is “no”, then it would follow that a large non-discovery of gold, ie gold being transferred from money to commodity, would NOT cause deflation?
Would you mind explaining which quantity theory money the Austrians do accept? Or the proper terminology. I was under the impression that Austrians do accept it.
Not the quantity theory of money, but the mechanistic quantity theory of money (as I wrote above). Please see the following chapter from Jesús Huerta de Soto’s book Money, Bank Credit, and Economic Cycles: “A Critique of the Mechanistic Monetarist Version of the Quantity Theory of Money”. Also, Benjamin Anderson critiques it in The Value of Money, as does Ludwig von Mises in The Theory of Credit and Money. The main grievance is that it is ‘mechanistic’, and as such cannot account for the true danger of inflation, which is changes in the relative price of goods.
Also, if the cornerstone is that inflation does not occur instantaneously nor sumultaneously, then by corollary, deflation does not occur instantaneously nor simultaneously?
Right, which is why monetary deflation usually causes the structure of production to flatten and narrow.
Can you provide an example of how gold can be introduced by artificial stimulation?
Two historical examples,
The introduction of gold from the New World into the coffers of Spain’s monarchy. This is Rothbard’s explanation of the price revolution (well, not necessarily Rothbard’s, as many economists consider the European price revolution as one caused by an increase in the supply of metallic money from the New World), and also accounts for the bubble which occurred in Sevilla.
Artificial decrease in the cost of minting coins, by offering minting free of cost. For gold traders, therefore, there was no cost in exchanging metal for coins.
Both cases describe a disquilibrium between supply of money and demand for money.
Chris Pacia, I agree with Murphy that the business cycle may not occur in a free market, but I am talking about a market with the presence of government. It is also very possible that in a free-market there would be no business cycle even if banks issued paper bank notes (or money-substitutes). But, this is not an argument of gold vs. paper, it is an argument of free-market vs. government, then.
What do you mean by this? Money is never “just another commodity”; it is distinct in that it is used as a medium of exchange (which other commodities aren’t).
It’s sub-optimal relative to what would have happened if the money had been lent instead of destroyed. If the money is destroyed (whether outright or by industrial use; the net effect is the same), then extra goods are “pushed” onto the market without any corresponding “pull” (as would have been exerted by the borrower). It will therefore take longer for this process to work.
(We might also consider the fact that the money-destroyer, in “letting the market decide” what to do with the underconsumed goods, is not him-/herself providing any information to the marketplace. I’m not sure what effect this would have, however.)
Even if the money supply increase is instantaneous and simultaneous, can’t there still be real effects if the knowledge of it is not shared? Suppose you woke up one morning and discovered that your cash balance had doubled, but you don’t know that everyone else’s has too. You’re going to go out and spend it – and producers are initially going to think that this represents a real increase in demand, at least until the price of their inputs goes up by the same amount. In the long run the prices may end up doubling across the board, but in the meantime there’s bound to be some real effect.
What I am getting at is that regardless if it is money as a commodity, or just another commodity like oil, as long as the market is deciding where to factor these commodities, a sudden injection/disinjection of money as commodity or any commodity, the market will still have to adjust accordingly.
I have a couple of related questions about monetary deflation, as well as how both monetary deflation and price deflation affect the balance between creditors and debtors.
In a period of high deflation, it could be that even with a nominal interest rate of 0%, real interest rates are very high. I’ve heard it said that you could simply lend at a negative nominal rate, but would this really work like this? Would you ever lend out, say, 1oz of gold and ask for only 0.8oz back? Or lend out $100 and only ask for $80 back? Why would you do that, when you could just hold on to that 1oz of gold and take advantage of the lowering prices yourself? In order for lending to be worth it, you need to get more back in nominal terms, which would mean a high real interest rate.
Is this why we look at monetary deflation as bad? For example, let’s say Bob lends $100 to Jane, and this $100 represents 1% of the economy. If the money supply drops by 90%, then that $100 now represents 10% of the economy. Jane has to repay 10% back to Bob, which is quite the feat. I can therefore see how monetary deflation skews things against the debtor and why it could lead to high real interest rates and why it would be less than optimal.
If we look at price deflation instead; let’s say Bob lends $100 to Jane, and this $100 represents 1% of the economy. If the supply of goods and services multiplies by 10 times and prices drop by 10 times, then this $100 still represents only 1% of the economy. Jane has to repay more real goods and services, but the prices of the same have also dropped, so overall, things are still balanced between the creditor and debtor.
Also, let’s say that there is a severe monetary contraction; wouldn’t this not only wipe out malinvestments, but make things tough on honest businesses as well? Let’s say that a business has assets valued at $100 and $50 in debt. After a severe monetary contraction, their assets are now valued at $10, but they still have $50 in debt. Aren’t they just completely screwed? Also, why would anyone lend out money in this situation when the rapidly increasing value of money means high real interest rates? Getting out of this cycle without just telling everyone they’re screwed and transferring most wealth over to cash holders is something I’m having a bit of trouble understanding.
The value of money is of an altogether different nature than the value of other commodities. We can trace the value of, say, iron ore: “Iron ore is valued because it is used to make iron, which is used to make tools, which is used to harvest grain… which is used to make bread, which people want.” If we try to do the same with money, the chain will never end. Hence it is at least non-obvious that changes in the supply of money should cause the same effects as changes in the supply of other commodities.