Economics Questions

Re: Reflation

simik — Wed, 22 Oct 2008 09:44:12 GMT

In case of emergency and sudden rise of demand for currency, one can issue his own currency backed by whatever one wants. In fact, you don't even need emergency to do that. Sure, a currency backed by gold is... well, as good as gold, but a currency backed by, say, Wal-Mart (think gift certificates) is not bad either. Any marketable, divisible, non-perishable good can serve as money. Sure, gold & silver are ideal money, but even a currency not backed by precious metals can be competitive on the market if you throw in some bonus to make up for lack of metal backing.

Re: Reflation

Wren — Mon, 20 Oct 2008 23:24:16 GMT

Anton Sugar:

You don't think that the free market could adequately regulate monetary equilibrium?

I do think it can. Personally I don't think monetary equilibrium/disequilibrium would be much of a problem except in extraordinary circumstances, but I'm really not trying to focus on that.

Re: Reflation

Juan — Mon, 20 Oct 2008 22:10:50 GMT

What's monetary 'equilibrium' anyway ? If the so-called demand for money increases, then the prices for goods and services go down as the 'price' of money, so to speak, goes up. Big deal.

Re: Reflation

Anonymous Coward — Mon, 20 Oct 2008 19:59:41 GMT

Anton Sugar:
The problem with hard currency, in this case, is that adjustments take time. You don't just mine gold in a second, after all. You can, however, increase the supply of money when it reaches disequilibrium with more money tickets.

It still takes time for the money to filter out through the economy and doesn't equally reach everybody.

The people who get it first, before it drives prices up, benefit at the expense of those who get it later or not at all.

Instead of having gradually falling prices (we're not talking about a bust cycle here but just your everyday specie) where technology or oversupply causes 'deflation' you end up with a system where prices always rise (mostly--because there is still technological innovation and oversupply that pushes prices down faster than monetary inflation) and one group of people benefit at the expense of all the others.

Lovely plan...if you're the one who gets to print up the money.

Wasn't Schumpeter's fatal flaw something about 'shocks' happening at random intervals and overlapping each other so a 'Walrusian equilibrium box' could never exist for the economy to break out of or some such? He had the four stages of 'shocks' IIRC with the assumption that each cycle would always effect the economy in the same way and cycle through at a steady pace while never overlapping.

Who knows, I remember reading the Austrian analysis on 'Schumpeter's Box' a while back.

Re: Reflation

Anton Sugar — Mon, 20 Oct 2008 16:57:05 GMT

Wren:

Anton Sugar:

Have you ever heard of Real Business Cycle theory?

I have but a "real shock" is still pretty vague. I see you mentioned a natural disaster and I was going to jokingly say, "what like an asteroid hitting the earth?" earlier but thought it would seem insulting so I decided not to. My understanding is that techonological andvances can also be considered "shocks," as well as probably other things so I wanted to know what you had in mind, given that I already thought you were alluding the RBCT. Hell, even natural disasters are vague, since there are a variety of them. Anyway, the fundamental problem here is still what happens when the demand for money exceeds its supply and my answer is it depends on the circumstance/context. If we're talking about non-corrective reasons for deflation, I do believe the money supply should be increased, but only with a regime of "hard" money and non-centralized banking structure. I think there should/would be checks on both inflation and deflation as krazy kaju expounded on, so monetary equilibrium in that case is not much of a problem IMO. It's in our current unfree market situation were these issues become sloppy.

You don't think that the free market could adequately regulate monetary equilibrium?

The problem with hard currency, in this case, is that adjustments take time. You don't just mine gold in a second, after all. You can, however, increase the supply of money when it reaches disequilibrium with more money tickets.

Re: Reflation

Jeremy Schutte — Mon, 20 Oct 2008 06:10:24 GMT

Anton Sugar:

krazy kaju:

To a very, very, minor extent. Most banks only keep 10% reserves for their irregular deposits. They essentially create money out of thin air.

No, no, no. It isn't about "the reserves" it's about the nature of the banks. A deposit is seen as an investment on the part of the depositor. The depositor knows he cannot withdraw all his money at the same time and in return he earns an interest rate for lending this money.

If he wanted the bank to be incapable of actually getting to his money, he could always file for a safety deposit box.

Why do you think people consider interest rates on their accounts when choosing banks?

krazy kaju:

If you agree with free and full reserve banking, what's the dealio?

I don't really "agree" with full reserve banking. I think it's an inefficient idea and one that should really be put away. Then again it really is a misnomer. Most people know they won't be able to go to the bank and just get their money. They know their are limitations to how much they can withdraw and they accept that contradict in return for interest payments on their cash.

People have little other choice - they can't make legally enforceable contracts in gold, for example, and even if they could they would be taxed at capital gains taxes every time they sold and made a 'profit' because the value of dollars has gone down.

Full reserve banking doesn't mean 0 lending, it just means that there is a difference between 100% reserve demand deposits and time deposits which are lent out for the period of time agreed upon in exchange for interest.

Truly do away with legal tender laws, though, and the dollar would quickly become worthless anyway.

The best argument for 100% reserve backed demand deposits is Jesus Huerta de Soto, in Money, Bank Credit, and Economic Cycles - I'd highly recommend you read through the entire work for a full understanding of these issues, from all perspectives (he digs deep into all monetary theories, not just ABCT)

Re: Reflation

Wren — Mon, 20 Oct 2008 01:09:58 GMT

Anton Sugar:

Have you ever heard of Real Business Cycle theory?

I have but a "real shock" is still pretty vague. I see you mentioned a natural disaster and I was going to jokingly say, "what like an asteroid hitting the earth?" earlier but thought it would seem insulting so I decided not to. My understanding is that techonological andvances can also be considered "shocks," as well as probably other things so I wanted to know what you had in mind, given that I already thought you were alluding the RBCT. Hell, even natural disasters are vague, since there are a variety of them. Anyway, the fundamental problem here is still what happens when the demand for money exceeds its supply and my answer is it depends on the circumstance/context. If we're talking about non-corrective reasons for deflation, I do believe the money supply should be increased, but only with a regime of "hard" money and non-centralized banking structure. I think there should/would be checks on both inflation and deflation as krazy kaju expounded on, so monetary equilibrium in that case is not much of a problem IMO. It's in our current unfree market situation were these issues become sloppy.

Re: Reflation

Anton Sugar — Sun, 19 Oct 2008 23:29:13 GMT

krazy kaju:

The problem is that you don't deposit your money for a set period of time in a normal demand deposit - you can take it out at any moment. So if I put $100 in a bank and that bank loans out $90, I in effect only have $10 (though the bank says I have the full $100). If I decide to take out $40 out of the bank in a week, that banks needs to take money out of someone else's reserves to be able to pay me.

To be clear, the required minimum for bank reserves isn't always what banks have in reserve. Some times, banks want to sure up on their ability to pay out, and keep more in reserve.

In any case, the bank does, in some way, tell you that you do possess $100, but in another way it is implied that you know that your $100 cannot be taken out of the bank all at once for the reasons that the bank will lend some of it out and pay you an interest rate for the right to do so - while binding you from instant withdrawal.

Now, I'm not a banker so I don't know all the facts, but a bank could take money out of another person's account to pay you back $40 (if this is the maximum that you may withdraw in one day) but that, in a way, is the contract written by the other person - allowing them to take out their money to do something like pay another. As long as that person is earning interest on their funds, however, I don't see the problem - or at least I think it is one much smaller than what many here believe it to be.

krazy kaju:

However, a certificate of deposit is different. It means that you lock your money away in the bank for a given amount of time. During that time, the bank can use that money to loan it out and you can't take it out.

In which the interest rate may be higher.

With a deposit, however, you are still allowed to withdraw money without the type of penalty you would receive with a CD so the system is more fluid.

Again, if you don't want your currency to be used for investment by the bank then why not just get a safety deposit box? You'll have to actually pay for that privilege, but that's your choice.

krazy kaju:

Just that you can take out all of your money. The problem being that when many people at once do it you have a contraction because banks begin to fail.

I was thinking more along the lines of cashing in a check. Perhaps I'm wrong about withdrawing from a savings account. I don't ever use cash, so I'm not sure...

krazy kaju:

A free market is unlikely to have sudden changes in the demand for currency.

What if a natural disaster strikes then? You don't think people will want to have more cash on hand?

Re: Reflation

krazy kaju — Sun, 19 Oct 2008 21:47:47 GMT

Anton Sugar:
No, no, no. It isn't about "the reserves" it's about the nature of the banks. A deposit is seen as an investment on the part of the depositor. The depositor knows he cannot withdraw all his money at the same time and in return he earns an interest rate for lending this money.

If he wanted the bank to be incapable of actually getting to his money, he could always file for a safety deposit box.

Why do you think people consider interest rates on their accounts when choosing banks?

The problem is that you don't deposit your money for a set period of time in a normal demand deposit - you can take it out at any moment. So if I put $100 in a bank and that bank loans out $90, I in effect only have $10 (though the bank says I have the full $100). If I decide to take out $40 out of the bank in a week, that banks needs to take money out of someone else's reserves to be able to pay me.

Often times, however, this "new" money exists as electronic money in the form of checks. So the bank can get away with keeping fractional reserves for a while.

However, a certificate of deposit is different. It means that you lock your money away in the bank for a given amount of time. During that time, the bank can use that money to loan it out and you can't take it out.

I don't really "agree" with full reserve banking. I think it's an inefficient idea and one that should really be put away. Then again it really is a misnomer. Most people know they won't be able to go to the bank and just get their money. They know their are limitations to how much they can withdraw and they accept that contradict in return for interest payments on their cash.

Just that you can take out all of your money. The problem being that when many people at once do it you have a contraction because banks begin to fail.

Mines operating with an increase or a decrease in production is a fine theory. I'm not sure how efficient it would be and how quickly they would be able to expand the supply of money, but it does answer the question originally posted.

A free market is unlikely to have sudden changes in the demand for currency.

Re: Reflation

jtucker — Sun, 19 Oct 2008 20:58:38 GMT

Coincidentally, this monograph on deflation appears in print next week.

Re: Reflation

Anton Sugar — Sun, 19 Oct 2008 19:16:47 GMT

Lee:

Whats your definition of deflation?

A disequilibrium in money caused by an increase in the demand for money.

Re: Reflation

Anton Sugar — Sun, 19 Oct 2008 19:15:53 GMT

krazy kaju:

To a very, very, minor extent. Most banks only keep 10% reserves for their irregular deposits. They essentially create money out of thin air.

No, no, no. It isn't about "the reserves" it's about the nature of the banks. A deposit is seen as an investment on the part of the depositor. The depositor knows he cannot withdraw all his money at the same time and in return he earns an interest rate for lending this money.

If he wanted the bank to be incapable of actually getting to his money, he could always file for a safety deposit box.

Why do you think people consider interest rates on their accounts when choosing banks?

krazy kaju:

If you agree with free and full reserve banking, what's the dealio?

I don't really "agree" with full reserve banking. I think it's an inefficient idea and one that should really be put away. Then again it really is a misnomer. Most people know they won't be able to go to the bank and just get their money. They know their are limitations to how much they can withdraw and they accept that contradict in return for interest payments on their cash.

krazy kaju:

People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the "price of money" would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always "tends" towards equilibrium but never fully reaches it.

Mines operating with an increase or a decrease in production is a fine theory. I'm not sure how efficient it would be and how quickly they would be able to expand the supply of money, but it does answer the question originally posted.

Re: Reflation

Anton Sugar — Sun, 19 Oct 2008 19:08:35 GMT

Wren:

That question is pretty vague. What do you have in mind?

Have you ever heard of Real Business Cycle theory?

If you want, you can use Joseph Schumpeter's example of creative destruction.

Re: Reflation

krazy kaju — Sun, 19 Oct 2008 17:34:57 GMT

In what sense? Are they implying that we would need a central bank to print money to fight a war?

Re: Reflation

Lee — Sun, 19 Oct 2008 16:07:35 GMT

Hey Kaju, I know this is off-topic but what would you say to the people who believe that if we're on a full gold standard and if we were some how attacked we wouldn't be able to raise enough capital to retaliate?