I was thinking, even if the Unites States (for example) were to switch to gold as their money and enforce 100% reserves, the rest of the world would still have central banks inflating their money supplies, expanding credit, manipulating interest rates and causing boom-bust cycles in the world economy, of which we would still be a part. It seems that, via our foreign trade, the important economic signals like interest rates would still be distorted, causing even domestic business investment to boom and bust, capital goods on the world market to be bid up too high, etc. Though maybe the problem wouldn't be as bad as it is now?
Does anyone know of any developed Austrian theory on the effects of the business cycle on a country with sound money in the midst of a world of unsound money?
Joel: I was thinking, even if the Unites States (for example) were to switch to gold as their money and enforce 100% reserves, the rest of the world would still have central banks inflating their money supplies, expanding credit, manipulating interest rates and causing boom-bust cycles in the world economy, of which we would still be a part. It seems that, via our foreign trade, the important economic signals like interest rates would still be distorted, causing even domestic business investment to boom and bust, capital goods on the world market to be bid up too high, etc. Though maybe the problem wouldn't be as bad as it is now? Does anyone know of any developed Austrian theory on the effects of the business cycle on a country with sound money in the midst of a world of unsound money?
I think you forget two things:
1. Exchange rates: Any manipulation by foreigners will be reflected on the value of the dollar.......off setting thier nominal manipulation.
2. Having a gold reserve standard and 100% reserves forces us to have a an equilibrium in the current account and the capital account balances. Example: If we have a negative balance in the current account, it means we have positive balance in the capital account. Today this mechanism is in nominal equilibrium, but far from it in real equilibrium; this is why we are living beyond our means, consuming more that what we produce.
Hope this helps my friend.
Let me see if I understand you correctly. As the foreign central bank inflates its money supply, this will be reflected in a lower value of their currency against gold more quickly than it is reflected in the prices denominated in their currency in their country? Thus we would be buffered from the effects of their inflation.
This one, I'm less sure I'm understanding you. I think you are saying that because our currency (gold) wouldn't be distorted, we would not experience the malinvestment in higher order goods.
I was thinking some more about some of the effects we might experience. Certainly we benefit from trading with the foreign countries. Even if their boom-bust cycles don't affect us directly, we would still be worse off when their economies do poorly. They are less productive, and thus we cannot benefit from their production as much.
Now, as far as the boom: Supposing we had no foreign trade at all, then we would not have the business-cycle cluster of malinvestment, but they would. That is, we would have the 'correct' balance between higher order goods and lower order goods. The foreign nation, on the other hand, would bid up their higher order goods faster than consumer goods. Now, if we did trade with them, we would find the opportunity for profit by selling them these capital goods, regardless of their absolute price.
For example, suppose the free-market would exchange one apple for one orange, but a foreign nation bids up oranges higher than apples, so that oranges trade for two apples. Regardless of the absolute prices (in gold or in their currency), one could export one orange, exchange it for two apples and import them, exchange them for two oranges and export them, exchange them for 4 apples, etc.
Thus it would seem that we would tend to export capital goods and import consumer goods. Could this tend to speed up the foreign nation's business cycle? Would they more quickly come to the realization that they have a surplus of capital goods and a shortage of consumer goods? Plus it would keep their capital goods prices from being bid up so quickly and so high, so would this tend to tame and speed up their cycles?
On the other hand, it would encourage our domestic investors to produce more capital goods and fewer consumer goods, in order to take advantage of the profits of trade, and then we will see that this has been malinvestment once the foreign economy busts.
One other factor comes to mind. As the foreign nation attempts to expand credit, it will drive the interest rates down in their own country. Thus they will have lower interest rates than we have domestically (all else being equal), and so it would seem that the foreign banks would find it profitable to lend to us at a rate higher than the going rate in their country, but lower than our domestic market rate. Domestic business would see this as a good opportunity to obtain credit, and thus we would be affected by the foreign expansion of credit.
Does this make sense?
It isnt just the expansion in the money supply that causes business cycles (though the money supply would still increase in commodity money) but the circulation of money in general.
The US can be in a recession. The US is a microcosm of the world. So too can a microcosm of the US, such as California, be in recession, and so can Sacramento.
Generally with commodity money and laissez faire free markets we should see occasional ~6 month maximum recessions.