Is inflation inevitable?

[RVonse]

SteveA,
I totally agree with your position. A standard to reference our money would help to stabilize our currency and also ensure the government was not ripping us off printing more money.

I tried to debate Bishop a while back on this but was not nearly so elequent as you have been stating this position.

[SteveA]

Quote by: RVonse SteveA, I totally agree with your position. A standard to reference our money would help to stabilize our currency and also ensure the government was not ripping us off printing more money. I tried to debate Bishop a while back on this but was not nearly so elequent as you have been stating this position.

Thank you much, RVonse :)

I wasn't certain if I was really being eloquent or too longwinded/verbose but I'm happy that some of the values of this are seen by other people too :)

Yes, like Regean used to say "Government isn't the solution. It's the problem" - I just wish Republicans would follow through instead of trying to outdo socialists at their own game.

(I've spent a few years now actively debating this stuff and the picture seems to continually become clearer over time - it's not left/right like everyone says).

It's going to change inevitably though. The question is how long and painful the process is.

[bishop]

kind of difficult to reply to your posts steve... being that you've practically written a novel. so, i'm going to reply to the comments relating to deflation and gold..

Quote by: steve Deflation isn't necessarily bad.

you're trying to minimize the effects of deflation.. deflation has caused us quite a lot of trouble in the past, more than short-term price drops. in our country's history, we've had several instances of economic depressions under the gold standard.. they grew into recessions because of the nominal volatility inherent in the gold standard - usually beginning with strong deflationary pressures. adding to the problems inherent with gold, the fact that gold produces an incredibly illiquid economic environment helped these problems grow into depressions.

there was the panic of 1837 which lasted about 6 years, the panic of 1873 which lasted 3-4 years.. other panics happened in 1819, 1857, 1893 and the great depression.. i included the great depression, even though it was post-1913, because it has all the same characteristics of gold-era depressions. also, policy makers used nearly identical monetary policies as those used during the gold-era.

since the great depression, we've had several economic downturns, but not one of them has ever grown into a depression. not one.... why? because the federal reserve can provide the liguidity the economy needs to recover. i shudder to think of what would've happened to us if we were on a gold standard after the recent dotcom bust.

[SteveA]

you're trying to minimize the effects of deflation.. deflation has caused us quite a lot of trouble in the past, more than short-term price drops. in our country's history, we've had several instances of economic depressions under the gold standard.. they grew into recessions because of the nominal volatility inherent in the gold standard - usually beginning with strong deflationary pressures.

There are a couple ways to have deflation.

1) Deflation occuring because the currency retains or increases in value isn't bad.

2) Deflation due to currency being pulled out of the system, can be harmful. It can also result in defaults on loans, if people have commited to paying money they can't later acquire.

You could easily create deflation by increasing taxes and pulling money out of the system from people. This increases the value of the remaining currency but at a cost.

But when a currency remains valuable and doesn't increase rapidly in supply, this is a relatively benign and even beneficial form of deflating prices. In that case, noone has lost anything but their money retains its buying power, and buying power increases as productivity gains elsewhere allow for more to be bought.

So, yes, central banks currently are able to create aritificial inflationary and deflationary pressures. For example, currently we likely have home mortgages at record levels. If interest rates are increased, people will have made planning with an expectation of lower interest rates that we'll see. So if someone borrowed $300,000 to buy a home, but with interest will be expected to pay back $500,000 over time, then if the banks restrict the growth in currency in the future, people won't be able to find enough money to pay the banks back, with the result of banks acquiring not paper, but real property. (Clever game huh?)

With gold you avoid this because there's no real limit to how much usable gold is available but when it's fiat money, you aren't allowed to "print up" your own money.

Yes, the Gold Standard was a bad idea but gold isn't. The Gold Standard was when they took peoples gold and gave them paper for it, so, yes I'd agree that the Gold Standard was a bad idea - it was the creation of our current dollar.

adding to the problems inherent with gold, the fact that gold produces an incredibly illiquid economic environment helped these problems grow into depressions.

No, gold is actually a very liquid asset. You can also use currency backed by gold (which is what the Gold Standard did but it gave government a monopoly on the currency, just waiting to be abused, as it before, during and after the Great Depression).

Liquid assets are things that are easy to sell and trade. Houses aren't very "liquid" because it takes a lot of overhead to trade ownership. Stocks are considered to be relatively liquid assets because you can buy and sell stocks rather quickly. Gold (and silver), since it was the currency used before the Gold Standard was almost by definition a liquid asset.

[bishop]

when i spoke about liquidity, i did not say that it's difficult to sell gold. are you being coy? it's a well known fact that liquidity - in terms of readily available credit - was a huge problem with the gold standard.

i see no reason to tie the dollar to any commodity - gold or otherwise. there are other ways to limit exchange rate volatility than by fixing it to a very volatile commodity. the value of gold is determined by the market, the value of the dollar is determined by the market... adding a middleman adds no value whatsoever. furthermore, today's gold prices are dependent on, not independent of, the dollar's value - and not vice versa. if that was not the case, you would've seen gold prices rising before nixon dropped the gold standard.



it also seems that when we balanced the budget in the late 90's, gold prices crashed.. and, it looks like right now, there's quite a bubble in gold prices - wouldn't be the first time that's happened.

i'd rather adopt less radical solutions - namely, a constitutional amendment requiring balanced budgets, with a permissable deficit of 1-2% of gdp if necessary. i'd also want to see interest rates up to 4.5-5%.. those two items will do a lot for the stability of our currency, and it's role as the reserve currency of choice.

[SteveA]

i see no reason to tie the dollar to any commodity - gold or otherwise.

The dollar is already tied to something to give it value. What is that? (I'll let you think about it and see why it has any value at all)

So if it had to be tied to something to be valuable, why not tie it to something less volatile and subjective?

the value of gold is determined by the market,

True, its value is determined by a relatively free market (though some laws limit its utility).

the value of the dollar is determined by the market...

Sure, there's a market value for dollars but is it a free market? (as in unforcibly biased)

Here, just to show you how subjective, volatile and centrally controlled the value of the dollar is, let's say the Federal Reserve decided to play a joke and printed up a few trillion dollar bills and buy up everything in sight (of course backed by the IRS to enforce the value of the paper).

When someone trades a house, its different, because they are motivating trade in a voluntary fashion with someone else by offering value instead of lack of incarceration. A bully at school who says, "Give me your milk money or I'll beat you up" isn't operating within what we typically call a free market or voluntary private exchange.

it also seems that when we balanced the budget in the late 90's, gold prices crashed..

Alternately, you could say the value of the dollar was strengthened when they slowed printing up a lot of them.

The truth is that you should flip this graph upside down and compare dollars to gold. What you'd see is a steeply dropping value with it only stabilizing once spending was limited.

If you compared gold against many other things, you'd have little of any of these wild swings, and instead relatively flat prices, independent of government actions (unless they specifically targetted some product legally).

That entire spike is artificial and created by government actions. See how stable it was on the lower part of the graph? That was when it was still attached to gold, and the only reason they couldn't maintain that was the fact that they spent the gold and people realized they were holding worthless paper. That's when the dollar started dropping (or alternatively as the graph shows, it was harder to buy gold, or oil, or food etc. with a dollar)

and, it looks like right now, there's quite a bubble in gold prices - wouldn't be the first time that's happened.

Wars cost a lot of money. They can't print up gold, but luckily for them they have laws requiring us to accept paper instead.

[SteveA]

Look at the price of Hershey Bars over time:

(BTW where's the price volatility while we had our currency tied to gold? The volatility occured when we initially swapped paper for gold, but it was stable as long as it remained attached, and later when we detached gold from the paper. Everytime we went further away from staying with gold, or something physical as a reference value, prices became more volatile and the value of our money dropped)

Initial period of dollar creation:
1908.....9/16 oz.....2 cents
1918.....16/16 oz.....3 cents
1920.....9/16 oz.....3 cents
1921.....1 oz.....5 cents

Stable while attached to gold:
1924.....1 3/8 oz.....5 cents
1930.....2 oz.....5 cents
1933.....1 7/8 oz.....5 cents
1936.....1 1/2 oz.....5 cents
1937.....1 5/8 oz.....5 cents
1938.....1 3/8 oz.....5 cents
1939.....1 5/8 oz.....5 cents
1941.....1 1/4 oz.....5 cents
1944.....1 5/8 oz.....5 cents
1946.....1 1/2 oz.....5 cents
1947.....1 oz.....5 cents
1954.....7/8 oz.....5 cents
1955.....1 oz.....5 cents
1958.....7/8 oz.....5 cents
1950.....1 oz.....5 cents
1963.....7/8 oz......5 cents
1965.....1 oz.....5 cents
1966.....7/8 oz.....5 cents
1968.....3/4 oz.....5 cents

Banks reneged on promises and we've had inflation ever since:
1969.....1 1/2 oz.....10 cents
1970.....1 3/8 oz.....10 cents
1973.....1.26 oz......10 cents
1974.....1.4 oz.....15 cents
1976.....1.2 oz.....15 cents
1977.....1.2 oz......20 cents
1978.....1.2 oz.....25 cents
1980.....1.05 oz.....25 cents
1982.....1.45 oz.....30 cents
1983.....1.45 oz.....35 cents
1986.....1.45 oz.....40 cents
1986.....1.65 oz.....40 cents
etc.
2005 ...?... $1.25?

The prices match gold.

So if people were trading gold, they'd still be able to buy Hershey bars for basically 5 cents worth of gold if we had never gone onto paper dollars.

See, it's the dollar that's volatile because noone knows what it's underlying value is, except for some vague laws that require it to be used for some transactions.

A candy bar is something physical that has real value to people who "use" them.

If someone offered to trade 10 loaves of breadfor a Hershey bar, would you probably accept the trade? Most people would. Why? Because of laws declaring the possible worth of the bread? No. Because they have tangible value that people desire, irrespective of any laws. Gold is similar.

The volatility and inflation of gold prices in that graph you show is not due to wild reevaluations of gold, or candy bars or bread or land etc. They all track rather well against each other. A cretain amount of gold trades for a certain amount of candy, and has for likely thousands of years. The volatility in all those similar graphs (if you plotted prices of them as well over time) is not due to physical value changing in gold or candy or houses. It comes from people continually realizing the dollar "isn't worth the paper its printed on" and expecting continually more dollars in exchange for things of real value.

Someday there will very likely be piles of dollars floating around that almost noone wants (except some kids will want them for monpoly money).

Look at historical oil prices (the black line in this graph is the price of oil. Ignore the red line which is mere economic mumbo jumbo)




--------------------------
The black line is oil prices over time and it matches the change in candy and gold etc.

So oil and gold are relatively interchangeable in value over time. So is everything else, except the dollar that all these prices are based on

Don't get me wrong. Some things really do change in subjective valuation to people but most anything is more stable that paper with nothing except legislative whim and the IRS to make people use it.

[Milton Bradley]

I think you both miss some critical points. The most critical being that Alan Greenspan himself has condemned the Federal Reserve as a criminal institution, responsible for misinformation, and theft of The Peoples monies. He remains convinced that the Federal Reserve is unconstitutional to this day, yet he continues to devalue the dollar, and run the criminal operation.


I also think you overlook some of the major reasons for the 1929 crash. It is well established that people were borrowing money from the bank to invest in the market because they were trying to keep up with their neighbors income of percieved "free money". This had dire consequences when the "panic" occured. Leading bishop to infer that some of the volotility attributed to gold, should really be blamed on unskilled traders, and panicked, uninformed people scrambling to recover whatever money possible.


Not to mention the influence exerted on the market by the players with the real money. Many people remain convinced that 1929 crash was at least partially intentional on the part of the big money players. Wealth is proportional, so even after the collapse the players with the largest piles still win the game, and end up with all of those stocks sold during the panic for pennies on the dollar. Literally the rich robbing from the poor.


So when arguing that the Federal Reserve system is better, you argue against law, and order, and the government operating under the limitations they agreed to when they ratified the constitution. So it matters not if the Fed is better at controling inflation if the answer proposed is not within the limits of the constituion. You are advocating White Collar crimes that go unpunnished while the criminals grow old babysitting their trust funds filler with our money.

[bishop]

Quote by: steve Alternately, you could say the value of the dollar was strengthened when they slowed printing up a lot of them.

but they continued printing dollars nonetheless.. also, people care less about the actual paper than the number. lots of people use cards nowadays, not paper.

milton, there will always be unskilled/greedy traders out there.. the only way to prevent that would be to heavily regulate the market. it's historical fact that our government/banks were powerless when financial/market bubbles popped under the gold standard. i've shown you in the past that fiat has been ruled as being constitutional many times during our previous debate.. don't play games.

[Milton Bradley]

I was primarily addressing the fact the the Fed is a private institution, making it illegal.


I want to know how you can advocate these types of crimes against your countrymen?


Where do you get the stones to to live inside the country, and side with the enemy?


Just like the other issues where you, and I differ, you get caught up agruing to fix the problems created by unconstitutional behavior, but you will not address the fundamental truth that it is the unconstitutional behavior that needs to be stopped.


The Fed cannot exist as a private entity if we expect to solve any of the problem it ceated.


How can you argue any of your points knowing that Congress has no control of the making of money under the current system? (and the myriad of other problems that you know it creates)


Thats what I want know.

[bishop]

they aren't crimes... i'm not drinking your kool-aid. the fed isn't unconstitutional, as no legitimate court decision has ever ruled as such.

[PatrickHenry]

Quote by: bishop the fed isn't unconstitutional, as no legitimate court decision has ever ruled as such.

Is it okay with you that US government official money is actually the product of a privately held banking institution?

[bishop]

*sigh*

the department of treasury prints money, NOT the federal reserve.

http://en.wikipedia.org/wiki/United_...f_the_Treasury

The basic functions of the Department of the Treasury include: * Managing Federal finances; * Collecting taxes, duties and monies paid to and due to the U.S. and paying all bills of the U.S.; * Producing all postage stamps, currency and coinage; * Managing Government accounts and the U.S. public debt; * Supervising national banks and thrift institutions; * Advising on domestic and international financial, monetary, economic, trade and tax policy - fiscal policy being the sum of these, and the ultimate responsibility of US Congress. * Enforcing Federal finance and tax laws; * Investigating and prosecuting tax evaders, counterfeiters, forgers, smugglers, illicit spirits distillers, and gun law violators.

the federal reserve is the agency that the corrupt, overspending government uses and abuses to finance its massive deficits.. the financial problems in this country have virtually always revolved around irresponsible fiscal spending.

[PatrickHenry]

Quote by: bishop the department of treasury prints money, NOT the federal reserve.

They are "Federal Reserve Notes" though, are they not?

Quote by: bishop the federal reserve is the agency that the corrupt, overspending government uses and abuses to finance its massive deficits..

So, would you say that the Fed colludes with the Federal Gov to create the debt? And does the Fed profit from government policy?

[bishop]

the notes buy u.s. debt which are paid back in dollars, which are created by the dept. of treasury.. if the government balanced the budget, either by moral obligation or by law, the government wouldn't need to borrow money from the fed - and consequentially, wouldn't need to print up new dollars to pay for its debts.

the fed definitely does profit from our reprehensible government. but, i don't blame the fed, i blame those who create the deficits. turning the fed into a purely public institution wouldn't stop the government from running deficits, now would it? instead, in that scenario, you could have some asshat like bush installing his minions at the fed - running up massive deficits and keeping interest rates ridiculously low. we see the pressures that are put on the fed as it is - it's my firm belief that greenspan wanted to raise rates earlier than he did (he waited until we began to experience inflation before raising rates).. it would be much worse if the fed was controlled directly by the government, specifically, by the executive branch.

[SteveA]

I can't disagree with anything in your last post, Bishop.

Though it still doesn't mean inflation is inevitable. Just that it's inevitable the way things currently operate.

[bishop]

but, there WAS lots of inflation (and lots of crippling deflation) during the gold days..

http://economics.about.com/cs/money/...standard_2.htm

The stability caused by the gold standard is also the biggest drawback in having one. Exchange rates are not allowed to respond to changing circumstances in countries. A gold standard severely limits the stabilization policies the Federal Reserve can use. Because of these factors, countries with gold standards tend to have severe economic shocks. Economist Michael D. Bordo explains: "Because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8. Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990."

a fixed exchange rate does not result in the absence of price fluctuations, which includes inflation.

[SteveA]

but, there WAS lots of inflation (and lots of crippling deflation) during the gold days..

No, the gold standard was not the "gold days". You're confusing the two.

During the Great Depression around 1930, some people tried to buy things with a wheelbarrow full of paper not a wheelbarrow full of gold but noone wanted the money. Does that sound like people were using gold or dollars during the Great Depression?

You keep thinking the gold standard was about using gold. Maybe that's what you've been taught in school, but it wasn't. It was a failure of the banks to retain the gold and limit currency production that drove the system into bankruptcy.

Don't blame gold for the failings of corrupt banking institutions, please.

Here, there are people who still remember the days too:

http://www.google.com/search?hl=en&q...=Google+Search

[bishop]

um... the examples/evidence i gave were BEFORE the great depression.. the price fluctuations cited in my last post, which obviously included inflation, occured before the creation of the federal reserve.

[SteveA]

um... the examples/evidence i gave were BEFORE the great depression.. the price fluctuations cited in my last post, which obviously included inflation, occured before the creation of the federal reserve.

Price fluctuations have always occured and still do today. That's also not the same thing as inflation. Inflation is a continuing trend toward increased prices. You say this happened before Great Depression, and I agree, because our paper dollars were created around 1900, so it makes total sense that we saw a crash less than 30 years later.

The Federal Reserve was running the show when the crash occured too. The Federal Reserve was created in 1913 to help regulate things ... and we had paper currency too, so it should have been simple to change the supply ... but we still had a crash, and the worst one in a long time. It's unexplainable, or is it?

To show you how stable silver is in comparison to the dollar, I found some information regarding a 324 year period from 384 BC to 60 BC in babylon.

Take this link http://www.iisg.nl/hpw/babylon.php and there's an Excel 4 spreadsheet. I picked column O.

If you look at the first dozen entries or so around 384 BC, the exchange rate for silver to barley was around 300 to 1.

Now drop down to the end of this table around 60BC, and look at the last dozen entries or so .... it's still around 300 to 1 over a 324 year period of time. Imagine buying something for $300 dollars today and 324 years in the future still seeing it sell for around $300!!!

Inflation is an entirely aritificial phenomenon

Ok, so you say, "Fine, but at least now we can regulate the currency value better and avoid much of the volatility the babylonians experienced".

You'd think so, huh?

Well, let's go back over the table and find some of the extremes. Remember they had no international currency markets, or global food transportation, refrigeration etc. When they had a famine, metal lost most its appeal. We can see about a 35 to 1 ratio between the extremes, likely due to famines or war. That's quite a variation but that's also over a 324 year period.

Now let's see how well the Federal Reserve has been able to *cough* stabilize *cough* the dollar in its short life time:

Let's take the range from 1970 to 1980 and look at the minimum and maximum values of a few items:

Soybeans: http://www.sharelynx.com/chartsfixed/SOYBEANS.gif

The minimum is around 250, the maximum around 1000. That's 4 to 1 in only 10 years

Cotton: http://www.sharelynx.com/chartsfixed/COTTON.gif

Minimum around 25. Maximum around 90. That's almost 4 to 1 also.

Zinc: http://www.sharelynx.com/chartsfixed/ZINC.gif

Minimum around 300, maximum almost 2000 for close to a 7 to 1 ratio in less than 10 years.

Let's zoom out and look at around 170 year history of coal prices:

http://www.em.gov.bc.ca/mining/Minin...1coaltotal.htm

Notice how stable coal prices were before the introduction of the Federal Reserve?

from a maximum of $3.94/ton in 1836 to a low of $2.88 in 1906 (slight depreciation over time, likely due to growth in technology and a larger more efficient industry).

Where's the volatile prices prior to 1900? I'm sure foods are more volatile but coal only dropped less than 0.4%/year over a 70 year period before the Federal Reserve was around. Wages I'm certain were increasing during this period of time, so coal production effeciency was definitely increasing.

Then from $2.88/ton in 1906 to $53.25/ton in 1982. That's a change of over 18 to 1 in less than 80 years. I should compound the grow but I'll skip it, that's an average change of 23%/year INFLATION (the deflation prior to 1900 was actually a good thing) in less than 80 years, after the Federal Reserve was running the show

Ancient babylonians with wars and famines managed to do almost as well over a 320 year period and it ended up their currency is still valuable, even today.