Rincewind

This is a interesting and insightful article about the FEDRES role in infaltion and the value of the dollar.

http://mises.org/story/2237

It's kind of long and the outlook is depressing, but you learn a lot in the process of reading it. Hey Cing, got any gold for sale?

Edit: Also on Digg: http://www.digg.com/business_finance...lation._Period.

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Required Reading for all TG sandboxers

leejo

oh that's biased.

xTYBALTx

Funny! The question I have, though, is similar to the objection any layman would raise: "If it has worked so well for the past sixty years, what makes it dangerous?"

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Switchcraft

Eh. He makes some classical economic mistakes by assumption that kinda bother me, especially in regards to efficiency always leading to lower prices. This is a fallacy. Efficiency leads to cheaper production. Cheaper production lends itself to lower prices, but then people have extra money. Extra money chasing the same amount of goods is inflation.

Inflation is a natrually occurring byproduct of an expanding economy. It is not just the result of printing too much money. The fed may have "dangerous" powers, but it also has the power to stimulate a faltering economy by encouraging investment. I guess in that guy's perfect world, none of us would ever get a car loan or a mortgage and he would be okay with that. Me, I think that we have the most powerful economy in the world and I don't know what he's complaining about.

GhostintheShell

It's an interesting phenomenon, the US economy.

On one hand you have a staggering national debt of $8.4 trillion dollars+. They keep raising the statutory debt limit because it just keeps going up and it can't be stopped.

http://www.publicdebt.treas.gov/opd/opdhisto4.htm

Then you have a fiat currency, one that is no longer backed by gold held in reserve.

http://en.wikipedia.org/wiki/Fiat_money

The value of the dollar is then based on the governments ability to generate revenue in terms of taxes, bonds etc. (Basically the solvency of the US economy.)

The average household debt load in terms of non-mortgage debt is also extremely high, if interest rates ever rise significantly many households living paycheck to paycheck with high debt servicing could easily be pushed into bankruptcy by rising monthly payments. I don't think very many of these people remember when North American interest rates hit 15%+ in the 70's and many people lost their homes causing a huge housing price bankslide. Imagine your monthly mortgage payment tripled over a period of 2-3 years and you had no idea if or when it would go back down...

Right now some financial planners are telling people to hedge against a possible US dollar collapse by moving money to the Euro.

Many scenarios could trigger a US dollar value slide and consequently a global economic slide, its is already sliding now in some people's opinions with the fed doing almost everything it can just to prop it up and hold current value. Higher interest rates and a large dollar value drop seem to be inevitable at this point its just a matter of how low it could go.

Lots of interesting reading out there on the topic, many of the articles are doomsday scenario's written by crackpots that for somereason would love to see the US economy collapse but a lot of it is also written by respected economists as well it just requires a little moderation.

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Certainly there is no hunting like the hunting of man and those who have hunted armed men long enough and liked it, never really care for anything else thereafter.
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Switchcraft

Ghost the only thing I disagreed with in your post was that. The value of the dollar is based on what people are willing trade for it. Everything else is babble and guesswork trying to change that or hold it steady. The government's debt could double tomorrow, and bread would probably cost the same. The debt could be erased tomorrow, and gas prices would still be "high." At the same time, those two events would probably change how many Euros people were willing to trade for dollars, but meh.

GhostintheShell

That's the terminology used by economists worldwide to describe the nature of how a fiat currency works. I don't know how else to describe it.

If the government cannot collect enough taxes to cover its debt the dollar is now worth much less on the world market. Since there is no specie gold or silver to cover its face value, the amount is based on the health of the economy.

People will charge more of those dollars for product for taking the risk of accepting a currency that has a dubious or dropping value on the world market.

I'm already seeing this cutting into my ebay store sales. I purchase locally produced goods that have a certain price for me in CDN dollars, I then sell those products to many US customers for a listed value in US dollars. With the huge drop of the value of the US dollar recently against the CDN dollar, I will have to raise my prices to make up for my eroded profit margins. When I cash ou t the US dollars into my CDN account I just don't get enough money anymore to repurchase more stock, for shipping and to cover my overhead. Simple market economy really.

Internally I don't know how it would work, but a economic downslide like this causes problems for economic trade outside the bubble of the US economy. It also raises the price of imported goods as seen in my ebay example. That eventually "trickles" (to use Leejo's terminology, lol) down to the the little guys in terms of increased prices for goods, lost jobs and decreased GDP. The value of the dollar certainly becomes more valuable to the people most affected by it.

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Certainly there is no hunting like the hunting of man and those who have hunted armed men long enough and liked it, never really care for anything else thereafter.
Ernest Hemingway, "On the Blue Water," Esquire, April 1936

Kerostasis

It makes it more expensive for us to import things, yes, but it also allows us to export things more cheaply. So its good for the trade deficit, if nothing else. =)

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ScratchMonkey

Wait.... The prices go down, people have more money, they spend it on scarce goods, ..... But didn't the cheaper production result in more goods?

Which definition of inflation are you using? To me, currency is supposed to be a fixed-supply commodity, so that it's availability can be predicted. We shouldn't have to guess each day how much currency is in the system.

Imagine if I go the hardware store to buy some lumber. I use their tape measure to measure a cut. I get home and find that my tape says that the 7 foot board I brought home is actually 6 foot 8 inches. Someone tinkered with the store's tape measure! But that's alright, they just "inflated" the value of a foot. So now nobody can predict how much wood they have until they try to build something with it. Chaos ensues.

Found these two items from Rep. Ron Paul linked from Digg:

http://www.house.gov/paul/tst/tst2006/tst071006.htm
http://www.lewrockwell.com/paul/paul333.html

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Switchcraft

Yeah, it did. But the same amount of customers. If I could make bread cheaper, and suddenly it only costs you a penny a loaf, are you going to buy 70 times more bread? Of course not. So now you have extra money.

We don't have to guess each day how much money is in the system...we already know. The fed fights inflation by removing money from the supply when needed. And the fed helps stimulate money by releasing more into the system when needed, too.

Your "fixed" supply of circulating money would create problems all on its own. All it would guarantee is that at some point people would run out of money. Imagine going back in history to, say, 1792, and telling our newly created US Mint "Alright, new law: We will only allow 4 billion dollars to be in circulation at any one time." (That would be enough to divide 1,000 dollars or so up among each person living in the US, which would have been a fortune. Nobody need come get all technically detailed on me about the exact invention dates of the dollar, either. I'm making a point, not a presentation.)

Fast forward to the present. 300 million Americans means we each get about 13 dollars...IF the money was distributed equally. But it wouldn't be, obviously. Anyone who chooses to save money has taken the money out of circulation. Bill Gates and his equivalent billions? Out of circulation.

Every immigrant who comes in and is afraid of banks and hides thier money in a mattress? Out of circulation. Every decision you make with your money either keeps the machine moving, or takes money out of the available supply. If Bill Gates sold all of his stocks and assets, put the money in a bank account that nobody could touch, and went to live with the natives in whatever country Brangelina has kids in next, it would take BILLIONS out of the money supply available to everyone else. There is simply no way to keep a certain, fixed amount of money in motion in a system like ours. So every once in a while, the fed adjusts based on market performance. That's a good thing.

Your analogy to the board of lumber isn't appropriate, I don't think. It might be if we were using a barter system. We are not.

I am a business owner. I sell lingerie, among other things. If I decide to sell you booty shorts for 18 dollars, it is because I have decided the dollar is worth 1/18th of a booty short. If my competitor wants to sell for more or for less, it is because he has decided something different. It is only those subjective determinations that determine the value of the dollar.

If there was only one dollar in all of existance, and I decided it still wasn't enough to buy my products, then that dollar isn't worth anything. But in your fixed supply system, that dollar would have to be split up among every single paycheck in America, and you'd be forcing people to value their products at millionths of a cent and our system would surely collapse the moment someone put it in a savings account.

Switchcraft

The term for too little money in the system is called deflation. It is generally considered worse than inflation. Anyone need merely search for the word on google to find about a bajillion articles on how much deflation sucks.

ScratchMonkey

"Too little money" is only a problem for people who can't understand fractions. With fixed-supply currency, smaller denominations would be used.

Saving money doesn't take it out of circulation. No bank I know puts the money you give it in the bank president's mattress, nor is it tucked away in the vault. It's loaned out to someone to invest in production. It still gets spent. It just doesn't get spent by me. I'm trading my desire to spend it now for interest, and someone else is trading their need to put off spending in return for paying me that interest. (The interest represents the "time value" of the money.") (The biggest problem is that inflation makes it very difficult to figure out how much of interest is to compensate for the declining value (inflation) of the principal, and how much is compensating me for deferring gratification so that someone else can have theirs now.)

The idea that someone rich is going to take his money out of the system is ludicrous. And even Bill doesn't have that much money compared to the whole system.

http://www.google.com/search?hl=en&q...=Google+Search
http://en.wikipedia.org/wiki/Deflation

Whether you have inflation or deflation, prices don't rise and fall as one across all industries. Should a 1980 computer cost as much today as it did then? Is the deflation in the computer industry a horrible thing? I suspect most people here don't think so. I certainly like the fact that a few weeks salary can buy a computer that even the entire Federal government couldn't afford a half century ago.

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Switchcraft

Great. So in a fixed supply system, in the future (assuming the system didn't collapse), we all end up using fractions. Thousandths of a penny to buy a loaf of bread.

It does not change the fact that the value of currency is subjective. It is only worth what people are willing to trade for it. It is an article of faith.

Regardless of whether you spend a half-cent on a computer, and it's 10% of your annual income, or you spend a thousand dollars on your new computer, and it's 10% of your annual income...you just did the same thing. You traded an article of faith for an actual product.

The only difference is that in your system, the federal government has no chance to take money out of the system if there is inflation, and thus can't use monetary policy to help keep the economy growing.

GhostintheShell

The US money supply isn't a "fixed supply"....2-3 times as much US currency has been printed than there was ten years ago...make any sense? Why they would print so much money?

What is the value of a dollar when they are printing money as fast as toilet paper?

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Certainly there is no hunting like the hunting of man and those who have hunted armed men long enough and liked it, never really care for anything else thereafter.
Ernest Hemingway, "On the Blue Water," Esquire, April 1936

CingularDuality

1/18th of a booty short. Duh...

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