Economics Questions

Re: Increasing money supply = inflation?

Stephen Adkins — Fri, 03 Aug 2012 20:05:03 GMT

No problem! If that's what he was looking for, then at the very least I know he received recommendations to read Man, Economy, and State, Human Action, and Economics in One Lesson. If he follows that advice his position should be pretty well honed, I would say.

Re: Increasing money supply = inflation?

David B — Fri, 03 Aug 2012 19:53:07 GMT

I should have been more careful. I didn't look to see if you did. Perhaps I was projecting my own interpretation of some of his responses :). Oops!

I didn't meant to mischaracterize your responses or anyone elses. I was trying to avoid believing he was actually trolling, and instead I was hopeful that he was honestly seeking dialog to harden and hone his position.

Re: Increasing money supply = inflation?

Stephen Adkins — Fri, 03 Aug 2012 19:35:10 GMT

David,

I definitely appreciate the need for that type of outreach, as you call it. Again, perhaps the entire discussion was in good faith and he was truly trying to learn. However, my overall impression was that he was not going to change his mind, and even worse, he wasn't going to attempt to modify his "categories", as you say.

As for the name calling, I try to make it a point not to go there. It is counterproductive. Thus, (without going back and checking to make sure), I don't think I called him anything like an idiot. I don't think I called him anything, since I know as well as anybody that ad hominem is simply an admission of defeat.

But for sure, you introduced an added element of civility that brought the tone of the thread up, so that's good.

Edit--

Yeah, I went back and looked. I never called the guy an idiot. The closest thing I said was that he displayed a lack of understanding.

Re: Increasing money supply = inflation?

David B — Fri, 03 Aug 2012 18:39:58 GMT

@Stephen,

I gotta be honest, I don't personally get bothered by those types of arguments. But I'm not impressed by them, I find them boorish, in both directions. But I've seen a lot of younger, less robust personalities take their ball and go home. I have a way I tend to do "outreach" which is what I view this as.

Now, when I read the other post here about Montagne's Perfect mathematical ... whatever it's called, I saw that the discussion rapidly degenerated in the same way. I didn't find any clear refutation of Montagne's arguments. When I go looking for analysis of anyone's "newfangled super-duper solve every problem theory", I appreciate it when I find clear, concise, logical refutation that helps me understand where the author went wrong. I was personally disappointed that this didn't happen in that thread. More importantly, when the discussion does devolve in that way, an observer can be left with bad impressions of both positions.

Now, I'm not the "guardian" of the image of Austrian Economics, but I personally felt compelled to do the hard low-level thinking that demonstrated clearly where these ideas went wrong. IF Rick's openly and honestly looking, I think it will be clear. If not, then hopefully my posts will stand as clear and honest points of reference when others look for similar answers.

I really, truly believe, as Mises did (see Ultimate Foundation of Economic Science), that Praxeology is the root of Epistemology and Logic, and that all human science social or otherwise must flow from this foundation. An Epistemology that doesn't embrace the teleological nature of human action and thought, can't explain the relationship between knowledge and reality, but when one includes human action it suddenly makes sense.

We can demonstrate the flaw in connecting these artificially constructed theories to social institutions and phenomena (economics and politics) which emerge from human action, BECAUSE they deny the a priori categories of human action. I believe I did just that, and I hope our community is stronger for it, both in image, and in knowledge.

If we're right, we don't need to be rude. We're right!! That's enough. It's the blowhard who looks foolish in the face of intelligent reason. And I can argue passionately, without calling names, or talking down to people.

I will also passionately defend your right to call him an idiot. I may differ in how I view an "idiot." An idiot to me is just someone with bad categories - categories he applies to reality in ways and in places where it doesn't fit. He's not some subhuman category of the human race. He has all of the same tools that you and I do.

I feel just as passionately about defending, supporting and expanding the influence of Austrian Economics. I also have strong opinions about what works towards that goal and what doesn't, and I won't shy away from saying so, either directly, or by demonstrating it with the way I communicate.

Re: Increasing money supply = inflation?

Stephen Adkins — Fri, 03 Aug 2012 18:03:44 GMT

Pleease...This would make me feel bad if I hadn't been following this forum from the start.

This discussion didn't begin with personal insults (nor, really did it ever end up going there). It started with what seemed like genuine questions about the nature of inflation and its relationship to the money supply. I am not super-active on this forum but I felt compelled to take the time to answer his questions, because they seemed to be in good faith. However, it soon became clear that he wasn't so much interested in learning as he was in pushing his own idea, which is no crime in itself (maybe he's right and I'm wrong), but becomes tiresome and repetitive when he fails to address the criticisms of his idea coming from several different people. I understand that he is coming from a different perspective, and that terms like "interest" "inflation" and even "money" can mean different things to different people. But to me it is somewhat arrogant to go to a website devoted to Austrian Economics and try to win people over without first learning the basics of Austrian Economics.

So if he feels that people were too mean to him and is ready to indict AE as a result, first of all, "boo-hoo," and secondly, I suggest that he take a look at the thread from the beginning and see that several people were engaged, interested, and not at all insulting, right from the start. The invective (which is a little too strong a word, IMO) only began later, when after long posts regarding terms like inflation, deflation, money, interest, time preference, he still misused them and hadn't modified his own position at all or even acknowledged their definitions in light of his own view. This made it obvious, again, that he was here to lecture, not to learn; unfortunately he's totally out of his depth in the subject he's trying to lecture everybody on.

Re: Increasing money supply = inflation?

David B — Fri, 03 Aug 2012 17:03:47 GMT

Actually, I've read some of the site for this guy now.

I'm saddened that there isn't some better representation here from Austrian Economists.

There are some huge fundamental flaws in his criticism of Austrian Economics, and some underlying assumptions for his system that are demonstrably false.

Rick, my hope is that you take this seriously and ignore the invectives which obviously make you feel you must be right if people get mad.

Let me give some examples, and these are really simple.

From the page : http://www.perfecteconomy.com/pg-what-is-mathematically-perfected-economy.html

In terms of freedom or ability to produce and trade, these anticipated conditions are equivalent to mathematically perfected economy™:

i. We are free to endeavor at non-injurious industry to the full extent of our capacities;

ii. We are free to trade;

iii. We are free to agree upon reasonable value;

iv. And because no one takes from the trade anything but the equal of what they contribute to it, each party receives the full, self-determined equivalent of their contribution to the overall pool of wealth.

Sounds wonderful right? Except there are some insidious fundamental flaws. In particular ii, iii, and iv.

Trade (or exchange) is predicated on a discontintuity of value! Each party to the exchange values what the other is offering more than they value what they have. They have DISAGREED on value. What they agree to under money is a price. But the agreement is in the exact quantity of money that the purchaser is willing to give up for the good they are getting. The purchaser values that quantity of money less than the quantity of money they are receiving. That's different, the only two things that have the same value is two items that are in fact equivalent substitutes for each other. Imagine you have a 5$ bill and I have a 5$ bill. We agree they have the same value. Under what circumstances would we exchange them? We wouldn't. Under what conditions would I give you a 5$ bill now, and accept in return a 5$ bill later? If I value 5$ later MORE than I value the 5$ now. This MUST be true, it's a priori.

That covers 2 and 3. Now let's look at 4. "no one takes from the trade anything but the equal of what they contribute to it." This can't be true, as I've shown you must benefit from the trade IN YOUR OWN ESTIMATION, or you would not engage in the trade. This subjectively perceived benefit is the source of all value. It drives exchange. Exchange to be efficient, results in indirect exchange. For indirect exchange to be efficient, the market will fix on some number of goods that will operate as mediums of exchange. And the market efficiently produces prices in terms of QUANTITIES (this will depend on the market unit, for metals its weight) of the medium of exchange.

But all of this is driven by the DIFFERENCE in value. If things were valued equally there would be no exchanges. So, what he actually wants is "Fair" exchange of value. There is no such thing. In fact, if you look back at 4, I hope you see there's a major flaw in this part : "each party receives the full, self-determined equivalent of their contribution"

Nevermind that what's actually being described is a production effort not a trade, and that confusion is a big deal. But lets say 3 men (George, Herman, and Archibald) engage in a productive effort to produce the aforementioned screwdriver. George puts iron and tools to work the iron into the effort. Herman brings the plastic for the handle and tools for working the plastic into a shape. Archibald takes the iron, plastic and the tools and produces the finished product from the inputs.

How much does George get? How much does Herman get? and how much does Archibald get?

"each party receives the full, self-determined equivalent of their contribution."

What if George thinks his contribution was worth 4$, and Herman says my contribution was worth $3.50, and Archibald, because he did all the hard work thinks, my contribution was worth 8$.

Well the total contribution by this method ends up being $15.50. You might say they should sell it for 15.50 and everyone's happy. Awesome, but wait... Anikan, Luke, and Obi wan, are offering their screwdrivers for 12$. No one buys the ones George, Herman, and Archibald made.

Now what? The system you describe would have them given a promissory note for the $15.50. They owe that same 15.50 back at some future time. Good everyone's happy. It's 12 months later, and they haven't paid back the 15.50. What does the issuing authority do? They come claim the screwdriver. Well hello, awesome. No, the screwdriver now either sits in a warehouse of crap no one wants, because it's overvalued. OR the issuing authority sells the screwdriver for less.

Explain how I want to be an issuing authority in this scenario?

Rick, as ornery as people might be here about some of this stuff that seems so obvious to those of us who've been thinking about such things for a long time, I can understand that it might take quite a bit to get your head around some of the deep implications of subjective value and human action.

But that doesn't make us wrong, and trust me Mike Montagne is very, very wrong on this. I'm a computer programmer. I'm a self-taught philosopher and economist (or not you can decide for yourself).

One thing he's forgetting is that with any logical, mathematical, or scientific theory or system the question isn't simply whether or not it's self-consistent. The question also arises whether or not it applies. I don't know if it's self-consistent. But I guarantee you it doesn't apply.

The Austrian criticism of the mathematical models isn't that it isn't good math. It's that it ignores the nature of human action. In particular it can't account for the ways in which people value goods and services in the economy. The criticism is that the models don't apply, or more precisely apply so narrowly as to be useless, because they assume things that aren't true, or conditions which rarely occur.

My non-economic observation would be that his site is setup like a standard "buy my product site".

Last point. He uses his mathematical model to demonstrate that the debt will balloon to total global collapse. He suggests that interest is the cause.

But if we look back at my example, the issue that he's trying to solve is built into production. It's the risk inherent in producing any good. "Will I make back my investment of time and resources?" That's the "flaw" that needs to be purged from the system. But it's inherent in every productive effort. We can't remove the fact that you might not engage in a productive effort! It's not a fault issue, it's a fact of the nature of human action. Losses occur when production outputs don't result in sufficient value to cover the costs.

So, looking back at the crusoe environment losses and profits were already there. Let's say that crusoe wants coconuts as a consumer good. He picks them up off the ground, and then exhausts those (without walking a long distance) and now he has to figure out one of two things. 1) Get the ones in the tree, or 2) walk farther.

In trying alternative ways of getting coconuts from the tree, he might try things that aren't worth the time and energy put in. That's a loss. Taking 4 hours to create a long stick (lashing multiple sticks together) that nets me 2 coconuts from the tree, is not as cost efficient as walking 1 hour and getting 10 coconuts from the ground, and walking back for one hour.

On the other hand manufacturing some type of lashing with which to shimmy up the tree, that takes 30 minutes to make and then getting 20 coconuts from 3 local trees in the next hour, seems like that's a profitable production effort.

Losses and profits are inherent in human action. In an economy with money we don't have to do all of the raw calculations of time and energy and resources that go into producing a consumer good. Instead we get prices established in the market. Those prices are used (accounting) to determine whether or not a production effort might be (future) or was (past) productive.

Losses and profits will occur, they are inherent, we will see them in terms of money.

What Montagne is conflating is interest and profit/loss in the system. What's causing the global debt crisis he's concerned about is the lack of losses being expunged by the system. Instead of defaulting on debt, which is how the system clears out bad investments, the current system, keeps pushing new money into the system, to try to prevent cyclical localized contractions.

Interest is the difference in the value of a good now when compared to the same good later. They are in fact different goods. I can construct scenarios where a good now is NOT worth as much as a good later. IF the quantity of money stays the same, a specific quantity of money is worth more now than it is later. To everyone, all the time. Interest rates are the discounted rate of return.

Montagne did not explain this issue. He equates money at all times in all places as the same value. Because he misunderstands value. It's subjective. He misunderstands production. It's delayed consumption. It has profit and loss built into it. He misunderstands the role of time in production. Deferred consumption only occurs when something in the future is valued more than an alternative action now.

Anyone can show that compounding interest must run to infinity. What he doesn't account for is that defaulting on a bad loan, or losing your investment in a bad business is the healthy recovery mechanism. The problem in the system today is that unproductive investments aren't being allowed to default so the market can normalize. We will get a global crash, which simply means a massive reallocation of all of the bad resource investments. The "book values" of all of these financial assets are bogus, and need to collapse as they would have long ago in a market economy. Yes, interest on these bad debts is a burden on the economy, yes it will cause a massive economic collapse. NO, it's not the fault of interest. Part of the reason is the interference with the natural market correction, by preventing the defaults. The other part is arbitrary expansion of the money supply (which happens in your system also) which makes it look like there's more demand for consumer goods than there is. The expansion of easy credit, props that view up, by allowing consumers to finance consumption through debt.

Defaulting on these debt obligations is the solution. It punishes the user of the credit, it punishes the supplier of the credit. The moral hazard is in interfering with this correction, by putting the burden on others who didn't engage in the unwise debt/credit creation.

Re: Increasing money supply = inflation?

David B — Fri, 03 Aug 2012 13:53:01 GMT

@Rick...

That's too bad. Evidently this has been discussed before here.

http://mises.org/Community/forums/t/2660.aspx

Re: Increasing money supply = inflation?

Rick — Fri, 03 Aug 2012 11:32:27 GMT

The monetary system is not mine and didn't claim it was as well. It is called Mathematically Perfected Economy™. The author is Mike Montagne. After the butcher job unfairly done on it in this forum, I would expect people to be more confused about it had I never mentioned it at all. It's really unfortunate people can't have civil discussions on matters that are the most important to us. I was going to propose that we get 3 people each from the Austrian's and MPE crowd and exchange ideas in a debate format with a few stipulations that no personal insults be allowed (issues only). But I'm afraid that time is past.

Thanks for engaging in a lively discussion guys. I can see where this is heading so I won't go away mad, I'll just go away. Take care!

the truth has evaded you, as the complexity of your idea has blinded you and disguised fallacy as solution.

Want it to stay "in your pocket?" Don't take it out of your pocket!

the only way people will engage in your plan is if a government coerced them to.

Stop trying to come up with the uber plan. You can't fix money.

Your proposal is a dishonest (or highly ignorant) and complex scheme

your system would require a totalitarian state

Your system is only valuable to a tyrant.

You might be confusing value with prices, but no matter, you don't seem to understand prices either.

But your system....... relies on all men agreeing with the central planners' decree that "IT SHALL BE WORTH $100,000!"

You have routinely ignored when others have tried to explain these to you (and why your economic theories are fallacy).

your proposal has LITERALLY no grounding in economics.

Re: Increasing money supply = inflation?

David B — Thu, 02 Aug 2012 17:44:46 GMT

@phi

Hey, I really think he's close to getting it, and I think he really is interested in these concepts. I want to give him the benefit of the doubt.

If I had come up with some neat idea which I thought would fix things, and people told me, "No! You're missing x", I'd probably take some time to evaluate x to determine if my ideas still fit. I'd argue and try to get my ideas to fit, and test what people said and see if I could get things to fit. If I realized I was pushing a square peg into a round hole I'd stop.

For example, I've been vocal around here espousing an a priori definition of ownership, property, and conflict as a basis for a Praxeological science of Politics. It'll be very hard to push me off of it.

But I don't hear him rejecting the criticisms, I hear him engaging with ideas he doesn't yet have his head around, like interest, value, prices, money. He has preconceived notions about what these are, and we're introducing the deep praxeological foundations from which these categories emerge. When he sees that recasting them in other ways leads to conclusions that can't be true in reality, he'll get it.

For example, humans only exchange value for value. There is no other type of exchange. Even a coerced exchange is value for value. If you threaten to punch me unless I give you my lunch money, I get an unbroken nose and you get my money. As you understand these things, it all plays out.

He's bright, he'll get it. My point is, that we're right, we've been down this road ourselves, his arguments and discussions aren't going to poke holes in Austrian Economics, and if he DOES somehow manage to, then he's going to make us all the better for it. At a minimum those all of us should get better at understanding and explaining Austrian Economics, and more fundamentally the praxeology, the science of human action from which all of economics derives.

But I'd put my money on his getting it (not much money, I'm risk averse). And once he does, this same passion for discussion and argumentation, and theorizing about solutions, is the kind of thing we need in the Austrian camp. We need people like this in our society, and we need them on our side.

Re: Increasing money supply = inflation?

Stephen Adkins — Thu, 02 Aug 2012 17:32:34 GMT

While you're at it, Henry Hazlitt's Thinking as a Science.

http://mises.org/document/3456/Thinking-as-a-Science

Re: Increasing money supply = inflation?

Phi est aureum — Thu, 02 Aug 2012 17:10:43 GMT

Henry Hazlitt's Economics In One Lesson.

http://mises.org/books/economics_in_one_lesson_hazlitt.pdf

Re: Increasing money supply = inflation?

Phi est aureum — Thu, 02 Aug 2012 17:06:30 GMT

Where did the money that corresponds to the screwdriver come from unless it was not created by the central planning organization you wish to replace banks?

Here are a few of the weaknesses of your system:

1. The promissory note is backed by nothing. It's a piece of paper that can only have value because other goods have value.

2. Your "common monetary foundation" is nothing more than a central planning bank that determines who is worthy to buy what, fixes prices, manipulate the supply of money to the benefit of only a select few. It's been tried and it doesn't work.

3. There is no longer a market to determine what market value is under your system. In fact, your system would destroy the ability of consumers to know what market value could possibly be. Only the central planning common monetary bank would be able to set and would have to enforce prices for its policies to be at all effective.

spent it into the economy, creating job growth and more wealth.

Again with the Keynesianism! Spending does not create jobs!! Spending does not create wealth!! Quit saying it does, because if it did, we shouldn't have the kind of unemployment we do in this country. Our government spends trillions every year, and no matter what you think, it doesn't create wealth; it redistributes it, and any jobs created are necessarily less efficient (thus less productive thus add less wealth) than jobs created by the free market.

Economic prediction is difficult because of human action, which luckily, your system would require a totalitarian state to enforce so human action could be limied. Of course, then economic theory goes out the window, and as history shows, these kinds of state do very poorly economically (see USSR).

Your system is creating money out of thin air, no matter how you try to rephrase it. Unless you let the seller (of the loan) determine his price (which may and mst likely will include an interest rate), and let buyers of labor determine the value of that labor, you have no price structure; you have an arbitrary set of prices that change at the whim of the central planners at the "common monetary foundation."

Your system is only valuable to a tyrant. It requires to force individuals to accept its prices and the values it assign to goods and services. It also will, like all retrictions of liberty, cause individuals to find ways to get around the restrictions, which then requires a chain-reaction of ever-increasingrestrictions on libertie of all kinds. Again, history demonstrates this to be so.

Am I saying real goods don't have value? No, I'm saying real goods only have value insofar as individuals are each free to voluntarily trade them all on any terms both parties consent to. Your system doesn't allow this. Thus, it would destoroy the method and means upon which values are determined, which are unique to each individual. You might be confusing value with prices, but no matter, you don't seem to understand prices either. Just because you think a house is worth $100,000 doesn't stop me from valuing it at $10,000 nor does it stop another man from valuing it at $1,000,000. But your system can't have that. It relies on all men agreeing with the central planners' decree that "IT SHALL BE WORTH $100,000!"

As to your question on interest relaying signals to entrepreneurs on whether to increase or decrease production, as well as supply and demand relating to this, you can start a new thread of that for all I care. You have routinely ignored when others have tried to explain these to you (and why your economic theories are fallacy). There are plenty of threads that have addressed these questions, plenty of free resources on mises.org, or you could simply read what myself and others have posted.

You could start here, and it's free, so there's no excuse unless you really don't want to know the answers to your questions and understand our criticisms of your proposal.

Re: Increasing money supply = inflation?

David B — Thu, 02 Aug 2012 15:36:46 GMT

@Rick

I think you're on the verge of a major breakthrough. Keep at it.

As you get more clear on the logical implications of human action it'll become more and more clear.

In paticular, no one wants a claim against your property unless it's at a discounted rate for what they believe is the market value of your property. converting that claim into other useful assets has costs, I'd rather have cash.

Re: Increasing money supply = inflation?

David B — Thu, 02 Aug 2012 15:16:06 GMT

Rick:

How much money do you create to correspond with a new screwdriver?

You don’t create any money as the buyer has the necessary funds to purchase it directly.

Wait, come back you can't gloss this over. I asked what the producer sells it for. If large goods get money created as a claim against them then all goods large or small have money created. I'm asking you how many units of this lien based currency do you create for my screwdriver?

Rick:

You've just described the Ponzi scheme we have, and the cause is fractional reserve banking. What you've described is no-reserve banking. What you're misunderstanding is that the creation of these units results in a lien against some asset. Without some mechanism to allow prices to find the supply/demand equilibrium, which this cannot do, there is no way to do economic calculation. Production falls apart. When this happens all of the liens end up defaulting putting all of the collateral back in the hands of this 0 interest bank you described. So, please explain how this is any different from what we're seeing now?

I agree you need collateral to back up a default on a promissory obligation but here’s the strength of this system

Wait, you can't move on so quickly. A default on a promissory obligation? So, what obligation was incurred by creating the promissory note? When a bank issues a promissory not, they also give me something of value, traditionally it was gold. Currently it's a trust-backed fiat paper money. I can exchange that money for goods. But how large is the obligation? No one wants to own 1/200,000th of my house. It doesn't have any use.

Rick:

A promissory note is issued by the lender. It is his and not the property of any institution.

Then where is the obligation? Under normal loans the bank bears the risk of default. In this case? Each person I spend a unit of this currency has a portion of an obligation, instead of value. I think your point is that at least something would back the money even if it was just a portion of an obligation, which the current system doesn't seem to cover. But you've already dodged the price setting function.

Rick:

Supply and demand is determined by buyers and sellers. The seller sells to the buyer willing to pay the highest price. The buyer shops around to buy at the lowest price. What does charging interest have to do with this? Interest will slow economic growth by taking away money from people who would have otherwise spent it into the economy, creating job growth and more wealth. Economic calculation is more accurate under this proposed system because no deflation or inflation exists!

Ok, you miss the role interest has in driving savings and investment. That time preference means future goods are not as valuable now as they will be. The exchange of something now for the same thing in the future is an exchange of two different goods. Interest merely tells you what current supply and demand in the market set the price of that difference in value. If we were to generate a price table the bottom line is that you are comparing dollars today with dollars tomorrow. If the interest rate is 8%, then 1$ now is = $1.08 next year on this date. That's a price difference between two DIFFERENT goods.

Rick:

No you don't have a $200k home. You have a home that has some value, that is actually a relationship to other goods in the market place. It is not and cannot be an arbitrarily generated number. What you don't understand is that these prices don't appear in a vacuum. They are value for value. Not value for random number. Your system doesn't have a way to generate a price!

The definition of deflation and inflation is the amount of money in circulation in reference to goods and services. Deflation occurs when there’s too little. Inflation occurs when there’s too much. How can you disagree with this? Obviously the $200,000 I used was an example. I don’t know what the price would be.

I disagree wtih this. How? Because it's inaccurate. Inflation and deflation are a money supply issue. Not too much or too little, but less or more. "Too much" is the adjective used by someone who doesn't like rising prices and vice versa. What's ignored is that the changes in prices with a stable money supply are caused by changes in supply and demand of the underlying goods. We all want more money to do more stuff. And unfortunately with governments printing fiat money, that's what happens. Some people vote themselves more money.

Money will always be competing for goods (actively engaged in setting prices by exchanging hands for goods) or sitting on the sidelines waiting for prices which motivate the holder of money to trade it for current goods and services instead of holding it in order to purchase future goods and services.

Rick:

Nor do prices. You haven't accounted for supply and demand, and you haven't provided value to your accounting units. And until you do this, it's not a system that has any resemblance to a real money system. If these arbitrary accounting units some become imbued with value, and are not arbitrarily created out of thin air in some amount to some real asset, then you might have prices appear. If they do, you then need to understand the role of time preference in coming up with that price.

Ask yourself this, if land always produces the same quantity of crops, and the productive income from the property is the source of the price, why does land have prices? Unless the future returns from the land are valued at a discounted rate, you cannot arrive at a price that is not infinite. That discounting of future income is also interest... Future goods are discounted when compared against current goods. Money is no different.

Prices fluctuate in the market because goods fluctuate in value relative to each other. Your system has no value on the left side of the ledger, under a gold system there is value there and it's relatively (not perfectly) stable. But it cannot be counterfeited. The only way your money can be created is from thin air. Who would trust it? What would it's value be?

Interest fluctuates to move capital. When rates rise, it's a signal that there is unmet consumption has risen and production has dropped, and we need more goods produced in order. This motivates savings and slows consumption. As money goes into savings and then into investments, the interest rates drop and consumption begins to rise, as people lose interest in delaying consumption. It's a never-ending cycle that naturally regulates the quantity of a stable money supply competing for goods in the market, and moves that money from savings into investment and then back to consumption. There is no planner, yet everyone gets fed.

Stop trying to come up with the uber plan. You can't fix money. And no matter what the system, someone will try to game it. Competition in money will allow savvy consumers to prefer soundly run institutions, and will punish naive consumers of banks and the crooked men who run bad ones. Trust me, gold and silver win. There's a long, long history of gold winning. It's not a fluke.

Listen to that link I gave you to understand how savings, production and consumption all work together to drive interest rates in the market.

I’ve listened to about ½ of the Rothbard discussion.

This is a long post and it’s hard to keep up with you guys.

The first point is that money is never created out of thin air. It’s always backed by a promissory obligation to give up ones labor and production over a period of time.

This system does have value. Are you saying real goods have no value?

No, I'm saying that prices are ratios of values not values. In your system there is nothing on the other side of the ratio, and in order to do exchage you end up establishing a ratio.

So how many claims to a screwdriver get exchanged for a claim on the house above? Meaning what's the unit of account?

Rick:

Why do you have to have interest to send a signal to increase or decrease production? Simple supply and demand sends this signal in the form of price fluctuations. If products become more expensive then that sends a signal to business to get moving and make profits.

How do prices get established in your system such that products can become "more expensive". More expensive means a rise in prices. How do those prices rise in your system of liens against property?

Interest explains the difference in the subjective value between present goods (including labor and land) and future goods (including labor and land) between two different actors. When I build a house, I've stored up money as a substitute for generating all of the goods necessary to build the house and instead storing them.

Go back and look at Crusoe level production. Eating a roasted chicken involves production to get to that point. All of these efforts go into creating the consumer good.

1. Find chicken

2. Kill chicken

3. Strip feathers

4. Remove the guts

5. Build a fire

6. Cook the chicken

Each takes time and effort to produce the consumer good, "chicken ready to be eaten".

Each step along the way is an investment of time and resources. It's production. Each step delays current consumption in order to produce a good I prefer to that current consumption.

1. Could've picked berries off a bush or larva off the ground and put them in my mouth.

2. Pick and eat berries while watching the chicken run around.

3. Eat raw chicken and feathers and guts

4. Eat raw chicken and guts

5. Eat raw chicken

6. Eat raw chicken while getting warm by the fire...

Each step is investment in a productive effort. At each step, I prefer the future good (cooked chicken) to the present consumption option.

It is this preference of a future good to the current good, which explains production. You cannot wipe this out. Austrian Economics (praxeology) makes the logical claim that all other things being equal, a current good has a higher value than the same good at some future time. The rate of interest tells us what that difference in value is. If you don't include this, interest becomes confusing. But as soon as you do include this difference in time preference things make sense.

1. Finite prices for land

2. Asset prices

3. Rent

4. Wages

Re: Increasing money supply = inflation?

Rick — Thu, 02 Aug 2012 10:01:21 GMT

There is no profit to be made, modest or otherwise, by making a loan at 0% interest. There is only risk that you won't get your money back

Have you not understood that there is no risk involved here? How can there be risk when at any given time the asset is worth what is owed on it? The cost to implement this is "fee based". Not some compound interest exponential function nonsense someone pulled out of the air.