Re: Head In The Clouds

2008-2-21 15:39:00

Larry wrote:

"Take a very simple example. Let's say that there is 1 trillion dollars in currency printed and available to the economy. Government then passes a bill to give 1 billion dollars to people on the lower rungs of income. Government doesn't have a billion dollars in existing currency so it prints a billion new dollars and gives it to these people as payments. The reality is somewhat obscured the system where the government pretends to 'borrow' this money through a complex shell game called the Federal Reserve and future generations are further in hock via the 'national debt.'

"The end result is that there is now 1 trillion plus 1 billion dollars in the economy. The amount of material and service goods available to be bought in the economy has not changed. Because of the simple law of supply and demand the price of everything goes up in proportion to the amount of new fiat dollars added to the economy. In effect more dollars 'chasing' the same amount of goods must ultimately raise the price of everything until supply and demand are in balance again."

JJ:

There one major flaw in your example. The amount of goods and services never stays the same, but is always changing. If money supply is increased to correspond with the increase of goods and services then there will be little or no inflation.

The fact that there is more flexibility with the fiat system is actually an advantage if it is managed responsibly. The fact that there is less flexibility with the gold and silver standard means that mismanagement and outside influences can create problems. For instance in the last half of the nineteenth century the supply of silver went from being scare to plentiful forcing us to make adjustments whether we wanted to or not.

An earlier problem occurred when silver dollars were largely withdrawn from circulation, because they could be exported to the West Indies and exchanged at face value for slightly heavier Spanish dollars, which were then melted down and taken to the mint for coinage into American dollars at a profit. This caused unexpected problems with our gold and silver standard of currency.

There is no money that can be issued that doesn't take good judgement to manage. Even adjusted to inflation the price of gold has been on a roller coaster of value as related to what it can buy in goods and services. For instance gold fell in value from $600 an ounce in 1980 to $300 in 1982. Within a period of only two years gold lost half of its purchasing power. People who had gold in their basement lost a lot more than those who had fiat money in their mattress. The opposite is occurring today.