Ya'll,
Perhaps I'm overlooking a very simple answer to this question, but it is something that is throwing me for a logical loop.
Can one pursue profit within a fixed-amount currency environment? It seems to me that you can't have profit unless inflation is possible. Or is that the point? If more profit is demanded, then the currency inflates, which reigns-in the amount of real profit that can be obtained?
A simple example
There is a fixed number of currency totalling $100. I own $2 of those dollars, and I put $1 back into the economy to obtain the goods and services I need to create something that should be worth $10 when I sell it. I manage to sell this something for $10 later, and therefore I now have $11. Thus, I started out with 2% of the currency supply and now have 11%. Thus, there is less money to circulate in the economy, and the currency deflates dramatically.
How can this process go on indefinitely without people experiencing catastrophic losses to release money back into the economy? What am I missing here? Is it too simplistic an example? Is there just always enough currency to go around? Does good inflation actually occur and balance all this out a some point in time? I'm sure all of this has been addressed elsewhere, so if anybody could point me in the right direction, I would really appreciate it.
Regards,Tele
Telemachus:Perhaps I'm overlooking a very simple answer to this question, but it is something that is throwing me for a logical loop.
You're confusing the nominal volume of money with it's purchasing power.
Another problem is you're assuming there is a shortage of currency. There is when you have a system of legal tender laws and no expansion of the supply. But without legal tender, people could trade outside dollars if they became short in supply. They could trade other goods for dollars. So the situation with a static supply is only possible under legal tender.
Prof. George Selgin who was recently in the forum discussing fractional reserve (username: selgin) has written about the private money arising in the market to fulfill demand where state supplied money failed to meet the needs of the people.
Something interesting to consider is that long term deflation is possible in a free market, which necessitates smaller divisions of money as time goes on. So instead of $100 and $1000, we might find ourselves needing $0.001. :)
First of all note that accumulation of wealth does not need to consist in money. The person who saves may trade their money for stocks and bonds, for example, and accumulate them rather than accumulate money. Profit is not necessarily held and accumulated in the form of money, although people will measure capital in terms of money.
Secondly, just as the price of oranges adjusts to equilibrate the quantity of oranges demanded with the supply of oranges, the purchasing power of money adjusts to equilibrate the total quantity of money demanded (to be held as cash holdings) with the supply of money. The demand for money holdings is always finite. The demand for wealth may be unlimited, but the demand for money is not. This is because holding money has an opportunity cost (of whatever you could use it for). Also the demand for money is in terms of purchasing power, not the nominal (face-value) amount. That is, people don't desire to hold a certain number of dollars, but a certain amount of purchasing power.
Suppose that, as the economy progresses, people desire to hold an increased amount of money, but the supply of money is fixed. What they really desire is to hold an increased amount of purchasing power, not an increased number of units of money per se. In general, they will attempt to increase sales and decrease purchases, in an attempt to increase their money holdings. Obviously, because the money supply is fixed, they will not succeed in holding a larger total number of units of money. But their attempts will cause prices in general to fall. This makes one unit of the money go further--that is, it has greater purchasing power. Although the total number of units of money remains constant, the total amount of purchasing power of money increases. This will satisfy the increased demand for money.
Likewise a drop in the demand for money would have the opposite effect.
i am going to bed so cant give a long answer.
think of the facts that "money circulates", think of the "purchasing power of money", think of the fact that "capital purchases depreciate"
more on this later if no one else steps up
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
I was just thinking about this today! This is actually a really cool thought experiment.
If not for the government inflating currency, purchasing power would continue to rise. You could theoretically get richer just by having a savings account.
Yeah, my thinking was too simplistic about all this, but I didn't know where to start in thinking about this simple scenario.
Joel: Suppose that, as the economy progresses, people desire to hold an increased amount of money, but the supply of money is fixed. What they really desire is to hold an increased amount of purchasing power, not an increased number of units of money per se. In general, they will attempt to increase sales and decrease purchases, in an attempt to increase their money holdings. Obviously, because the money supply is fixed, they will not succeed in holding a larger total number of units of money. But their attempts will cause prices in general to fall. This makes one unit of the money go further--that is, it has greater purchasing power. Although the total number of units of money remains constant, the total amount of purchasing power of money increases. This will satisfy the increased demand for money.
This is what I was looking for. I couldn't understand what sort of feedback mechanism would allow currency to re-flow under a fixed-currency regime, but this makes sense.