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Valyooo (37.62)

Unchanged money supply vs high inflation vs stable money increases



October 25, 2010 – Comments (2)

So clearly one of the most discussed topics on this board (probably only second to gold being a bubble versus not being a bubble) is printing of money and bank credit.  The only two sides I ever see being presented are printing a boatload of money, and an unchanged money supply.

There is no way that nobody here supports a more stable increasing of money supply.

In fact I don't understand how anybody can like an unchanged money supply over a stable increase.

For anybody who has read the Schiff book How an Economy grows and why it crashes, he uses simple examples to keep things more down to Earth.  He talks of a world in which the only item (originally) is fish.  People eat the fish, and fish is used as currency.  If soembody underconsumes fish and uses the time he would normally use to fish to build a net, he can then catch more fish.  So he underconsumed (Saved) to later be able to consume more.  He would then loan out fish to other people so they could have fish to eat while they built their nets, and the people would use their new nets to catch extrra fish and pay back the guy who lent out the fish, plus extra fish as interest.

The guy was able to pay back the extra fish interest because he caught more fish.  Therefore there was an overall increase of the supply of fish.  So people could eat more, but there was also more currency. 

If there was an unchanging supply of money, people would not make loans, because there would be no way, in aggregate, to pay back interest.  Investments would be terrible, because even though a company is improving efficiency and churning out more real goods and services, the money is unchanged.  There is more stuff, and less money.  Yes, purchasing power increases, but your dividends decrease.

So, I believe money supply should be increased by the same amount that productivity is increased.  Otherwise, loans in aggregate would be a bad idea.  Too much money supply increase, and especially our wacko bank credit system = nasty inflation. Unchanging money supply = stifled production.  Increasing money supplies equal to production, and NOT relying on fractional reserve banking, seems to me to be the clearest cut answer to financial problems.


2 Comments – Post Your Own

#1) On October 25, 2010 at 4:32 AM, Valyooo (37.62) wrote:

In effect, an unchanged money supply would be a zero-sum economy

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#2) On October 25, 2010 at 9:12 AM, Melaschasm (70.30) wrote:

You are forgetting about changes in the interest rate.  In a free market, interest rates would adjust because of increases or decreases in the money supply as well as changes in demand for saving and borrowing.

In a stable money supply situation with growing productivity, interest rates would be near zero (assuming low risk) because the buying power would be growing over time (deflation).

A slowly growing money supply, offsetting  productivity increases so that buying power remained the same, would result in low, but slightly higher interest rates.  Since the return (profit) would be exclusively from the interest earned, the rates would be higher than in a deflationary environment.

Printing money faster than productivity increases would result in inflation, and much higher interest rates.  In this situation, interest rates would need to not only provide profits, but also overcome the falling buying power of the money being borrowed.

Perhaps the worst situation of all would be frequent changes in monetary policy.  If the market can not predict how the money supply will change over time, everyone will be forced to assume the worst from their vantage point.  Lenders will need a high interest rate because they assume inflation, and borrowers will need a low interest rate, because they will assume deflation.  Although an adjustable rate would help overcome this issue, it still does not solve all the problems, since inflation/deflation does not effect all parts of the economy equally.

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