Is inflation inevitable?

[bishop]

first off, i have a broader conception of what inflation is.. i see inflation as being either nominal or real. both are valid definitions in my view, and both have economic impacts. so, our disagreement with regard to inflation depends entirely if you think that nominal inflation is a legitimate economic term - or if you want to disregard it, believing that real inflation is the only legitimate definition.

i have already shown the wild swings in nominal prices when we were in the classical gold era. real inflation was virtually nonexistant, at 0.1% per annum.. of course, so were wages and the general standard of living - that never began to really improve until we moved away from gold. the gold standard protected the elite, encouraged hoarding, and if you know your industrial revolution history, workers were the ones who began moving against the gold standard. gold prevented the "little man" from ascending the economic ladder.

plus, the elite regularly manipulated gold inventories - or they'd simply debase it. and then you have all those nice panics. gold can be manipulated just like fiat, neither is superior in that regard.

and there was always the constant reality of deflation, which is THE worst growth killer. pro-gold people always talk about inflation, but rarely mention deflation. the growth rate of economies beginning in the 1700's, and continuing onward, generally outpaced growth in gold reserves. instead of adjusting the level of money to match the economy, with gold you have to adjust (eg. lower) the economy to match the level of the currency (eg. gold). what a winning idea - it's no wonder why we had some eight depressions under the gold standard (all of its variants) and none under market-controlled fiat. economies hurt when inflation gets too high, but its impact pales in comparison to deflation. people and companies don't spend or invest when deflation is in the air.

and since we've completely dropped gold, the anchor/noose that it was, our economy has been able to grow by huge leaps and bounds - much more than what was ever experienced under the gold standard. so too have the world's other economies. just looking at poverty rates alone, 56% lived in poverty in 1900 compared with 11% in 1973.


but yes, i will concede that real inflation rates were virtually nonexistant under the classical gold standard. that's about one of the only positives to gold.

[Milton Bradley]

Quote by: bishop and since we've completely dropped gold, the anchor/noose that it was, our economy has been able to grow by huge leaps and bounds - much more than what was ever experienced under the gold standard. so too have the world's other economies. just looking at poverty rates alone, 56% lived in poverty in 1900 compared with 11% in 1973.

To be fair though, shouldn't one consider the implications of Globalism in this equation?


We have hitched our economy onto the world market, and there can be no doubt that there is a huge influx of monies from foreign investors where they were prohibited by law before Reagan.


Plus the money from the disenfranchised countries attempting to pay back their loans from the World Bank. That would compute into this somewhere, would it not?

[GodBlessAmerica]

My personal opinion is that there has been a housing price bubble not only in America, but also around a lot of the world. If and when this stuff hits the fan, the result could be global.

I don't like high housing prices because the property tax is based on price and if you buy a house that was 200k for 700k, your property taxes go up from $2500 to about $8500. Not only is that a lot more tax, but the loans being made are rediculous.
You have people qualifying for 550k interest only loans who make only 50k. These interest only loan folks are the most vulnerable to a bubble bursting in RE. They could lose it ALL.

China for the first time also came into the global market for gas, so with more demand and no new supply, prices will forever be higher and that will raise the prices of other things.

I could say more, but this is a post, not a book.
Best of luck to everyone, I hope nobody has bad times.

[SteveA]

Quote by: bishop first off, i have a broader conception of what inflation is.. i see inflation as being either nominal or real.

Real inflation occurs when the currency because worth significantly less over time. This depends on what the currency is but paper has too many factor stacked against it to avoid inflation.

The simplest way to look at it is: Take a dollar out of your wallet or the paper bank statement can consider what the odds are that 100 years from now things will have changed and noone really wants to give you something of real value to them for those things which are rather etherial in value.

Just like we're very likely to see a housing bubble because once emotions settle down, people will likely find they no longer want to throw half a million dollars into a home, and people look for more realistic prices.

both are valid definitions in my view, and both have economic impacts. so, our disagreement with regard to inflation depends entirely if you think that nominal inflation is a legitimate economic term - or if you want to disregard it, believing that real inflation is the only legitimate definition.

One I view as mere volatility, in that at some date in the future a currency is likely to return to some historic value.

The dollar has truly inflated in that you'll never be able to buy a candy bar with a nickel, whereas gold (or other items that have retained such some tanglible value from 100 years ago), still can buy able the same thing.

Inflation is when prices increase and never return. That's a bad investment.

Think of it this way. When you buy a stock, you do so expecting a return on your investment. Inflation is the same as buying a stock that always drops in value. There's little reason people would buy such certificates, unless they're forced to (which they legally are - at least to some extent).

i have already shown the wild swings in nominal prices when we were in the classical gold era. real inflation was virtually nonexistant, at 0.1% per annum..

Agreed so far ...

of course, so were wages and the general standard of living - that never began to really improve until we moved away from gold.

Nope, that can't be correct because we had technological improvements while still using gold for trade, with an increase in living standards etc. These would have had to be reflected in increased gold production and wages as well. Here, let me look for some historical wages in gold to prove it:

http://www.pierre-marteau.com/currency/indices/uk.html



Sure enough, industrialization probably started around 1825 in Britain, and you can see it as increased wages.

We were already growing fine, until inflation began under a paper currency and we experienced the worst depression in U.S. history, after central banks and the Federal Reserve came into power.

It's actually astounding how poorly the government acted in an attempt to fix things. (The government was paying people to destroy their products and blaming problems on product improvements)

the gold standard protected the elite, encouraged hoarding, and if you know your industrial revolution history, workers were the ones who began moving against the gold standard. gold prevented the "little man" from ascending the economic ladder.

And how does that work? It would seem someones labor couldn't be taken from them if things were done between individuals in a private transaction without some elites able to rob the value of their assets.

If anything, now we're seeing a greater disparity in incomes because of the ability to create "wealth" out of thin air, and it's not the little buys that are running the printing presses.

For example, my in-laws came from Cambodia. Most everyone had some little stockpile of gold there, until the communists came in and stole whatever wealth they found. It's much easier for individuals to protect their wealth in a more tangible sense than hope banks will keep their promises. At least with gold if someone's going to take it, they've got to do it physically, so you can at least see who the thief is (even if you can't do much about it).

plus, the elite regularly manipulated gold inventories - or they'd simply debase it. and then you have all those nice panics. gold can be manipulated just like fiat, neither is superior in that regard.

How can someone declare what gold is worth for everyone else? If you're talking about people manipulating large reserves of gold to swing prices, it's not doable for any large period of time because you lose a good percent of the money trying to do it. Check out the guy that tried to corner the silver market and see how much money he lost in the attempt.

and there was always the constant reality of deflation, which is THE worst growth killer.

And why is deflation bad? Seriously, think about it. If you earn the same amount of money, but prices are less expensive, it just means technology has improved the supply of goods. (There's a reason why "the powers that be" want people to believe deflation is bad).

Now there is a second way to create deflation - tax everything in sight, so people have little money left and can't afford to pay much, so prices drop.

One type of deflationary pressure is good, the other bad. Deflation in itself isn't bad. It just depends on why it's occuring.

pro-gold people always talk about inflation, but rarely mention deflation. the growth rate of economies beginning in the 1700's, and continuing onward, generally outpaced growth in gold reserves. instead of adjusting the level of money to match the economy, with gold you have to adjust (eg. lower) the economy to match the level of the currency (eg. gold). what a winning idea - it's no wonder why we had some eight depressions under the gold standard (all of its variants) and none under market-controlled fiat. economies hurt when inflation gets too high, but its impact pales in comparison to deflation. people and companies don't spend or invest when deflation is in the air.

Ok, it's true that gold production tends to nor follow the growth in other industries, because less gains can be made through technology. So, yes, the supply of things to buy with gold, tends to increase but again, this isn't bad.

Consider money in a bank to be a certificate of deposit. If you had some savings in gold, it's effectively the same thing. You work, and produce something, in exchange for effectively an IOU. Gold is an IOU that can't be counterfeit.

So, yes, as we make productivity gains, people will find more value to saving their currency. This is fine because if the value of their savings is increasing, it means other people have made a profit with the resources you lent them.

If someone is sitting on some gold and not spending it, that's not bad. They traded something of value in exchange for it. Let's say someone built and sold a washing machine in exchange for some money. They see the purchasing power of the money increasing in value at 1%/year and might decide not to spent it (remember people can still work and save at the same time). That's good, because someone else is benefitting from the waching machine during this period of time. That's the same as why people earn money from stocks.

If you wanted to assure something doesn't inflate, have people buy something that loses value, like fruit for a currency. Now a person that hangs on to their fruit for a year finds it worthless. That's not a good currency. On the other hand, if currency were stock certificates, there would effectively be deflation (prices relative to the stock would appear to decrease) as the companies grow. This is a good investment, and should be encouraged.

The reason why education tries to scare people away from deflation is because printing up new money creates inflation. So obviously banks would prefer everyone to feel that as their money buys less over time, that's a good thing, though in reality it's not (just like oil companies would love people to believe higher gas prices is a great thing) It means it's a bad investment.

and since we've completely dropped gold, the anchor/noose that it was, our economy has been able to grow by huge leaps and bounds - much more than what was ever experienced under the gold standard.

I could print up million dollars bills and hand them to people for free. It would only kill the economy though.

The important issue is not dollars in the bank, it's real assets and living standards. (Even gold is just a pretty metal without much worth other than it's scarcity).

The leaps and bounds have been made through technological gains and efficiencies in how we work, not whether or not our bills have a 1 or a 5 number printed on them.

You could easily ruin an economy with a paper currency. I'll leave that as an exercise to think through.

so too have the world's other economies. just looking at poverty rates alone, 56% lived in poverty in 1900 compared with 11% in 1973.

Of course people have a better standard of living, but that doesn't mean it can't be better if we remove abuses in our currency.

but yes, i will concede that real inflation rates were virtually nonexistant under the classical gold standard. that's about one of the only positives to gold.

Thanks.

I'll admit that there are likely better currencies than gold (land could possibly be an even better basis for a currency) but paper and our loose credit system aren't one of them.

[SteveA]

Oh and another problem created with fiat currency - the trade deficit. It might seem nice in the short run to get a lot of free goods on credit bought with paper from foreign countires, but look at what happens long term. Low interest rates and lots of "free" money sound great, right? We're "stimulating" the economy.

A ton of this new money goes overseas to buy products, effectively on credit, but guess where all the factories and investments made to build these are? Yes, in foreign countries as well. This isn't entirely due to diluting our money supply (inflation) but it wouldn't be possible for nearly as long without the printing presses running because we'd have to rely on tangible goods for trade instead. That would require a more even exchange of goods along with more industries and manufacturing infrastructure remaining here. Also, with inflation, those holding dollars will find it less and less beneficial to do so and if the creditors decide to limit our overexpenditures, we'll find not only those dollars coming back, and buying up real goods but little manufacturing ability to supply that demand and inflation would skyrocket (check out the 70s for an example).

Even Alan Greenspan, the chairman of the Federal Reserve has stated we should rely on an unbacked currency to denote value.

[bishop]

there are fundamental problems no matter what monetary system you use. one system prevents long-term inflation, but tends to produce wild price volatility and contributes to economic depressions.. the other is the most flexible and capable of avoiding economic depressions, but policymakers also abuse it and run huge fiscal deficits.

moving back to some fixed standard would be absurd, especially given the financial service businesses that have grown because of fiat. and, again, forcing the federal government to balance the budget would go a long way towards strengthening the dollar in real terms.

[Milton Bradley]

“The importance of an honest, stable, gold money supply is to ensure that relative scarcity, demand and production efficiency of goods and services are accurately represented through their actual market prices. Prices are information.”
-Boston T. Party


“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
-Alan Greenspan, 1967


“We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
-Robert H. Hamphill, Atlanta Federal Reserve Bank

“There is not really any such thing as federal money. Every dollar spent at the state or federal level got there by the sweat of someone's labor. Even the funny money created out of thin air carries with it a future taxpayer obligation to pay.”
-Senator David Duke R-Colorado, from Media Bypass, March 1996

“If Congress has the right to issue paper money, it was given to them to be used by... [the government] and not to be delegated to individuals or corporations.”
-President Andrew Jackson, Vetoed Bank Bill of 1836

“Congress had no authority to grant a private consortium of banks the monopoly privilege to create the nation's currency.”
-Boston T. Party

[SteveA]

Thanks for the quotes, Milton.

Here's another one:

U.S. Constitution Article 1, Section 8, clause 5:
[Congress shall have the Power] To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

(italics added)

I don't know whether this has been amended or not though.

[Osborn F Enready]

SteveA said:
I'm saying that yes, the cost of things versus gold can go both up and down relative to it but it's limited and isn't the same as a general deflation of prices. It's remains relatively constant for the simple fact that people can acquire more gold which dilutes its value and keeps it stable. It's a natural balance that has existed for thousands of years and still does.

I say:
Steve, I have purposely avoided this debate to try not to agitate Bishop, and frustrate him into quitting the thread.

Your statement above though, eloquently states what I have tried to say in all of my posts about the Gold Standard with Bishop, and somehow failed to do. Excellent posts so far, and I completely agree with your posts.

I notice, WITHOUT trying to make anything personal here, that Bishop has come to the point that both systems had flaws, but he thinks the fiat system is better, whereas most Libertarians and old school liberals feel the Gold Standard was better.

On that note, I have to stress:
If both systems are flawed, is it not better to stick to the only one of the two that was Constitutional?
My basis for the entire Gold Standard argument.

Thanks for bringing the knowledge and numbers to prove the point Steve, I fall short in the numbers department.

[SteveA]

My pleasure, Osborn.

Well prices did deflate slightly under a gold standard but as I said, that's not a problem, it's just that gold production doesn't increase as fast as other things (like food for example) - so over time, gold tends to increase in value relatively to things that have had greater technological gains.

I'd also like to reiterate that gold is only one possible form of currency. The important part is to just assure that people trade, it's based on voluntary interactions of real value instead of legal requirements to do something for mere paper. It's easy to see how such a system could be abused (as it has already been).

We don't accept a never ending supply of IOUs from neighbors, nor should we allow government that priviledge either.

To make it a little clearer what the direct problem is:

When you work and provide services or products for someone else, you expect to be paid. The only paper you would normally except from someone would be an IOU (maybe along with some interest for taking the risk of not being paid). What you really want are real goods and services in return for your labor - an exchange of value between people, but the paper itself isn't worth anything.

The problem is when someone buys your labor, under the current system, you have no idea if they really did provide any services or product to put value behind those dollars - it could be a credit card or new money added to the system that has no real value. You worked and provided real services for basically nothing except some paper and then when you try to go buy something with the paper, you find out there's not much it can buy, because people are making "money" out of thin air and it hurts the economy for everyone, though it provides a way for people "running the presses" to make off with a lot of real goods and services. It's really no different than countfeiting, except it's legal.

It's not too hard to estimate the amount of new money that's been added to the system either, and it happens to be a ton. It's not shear luck that government owns half the land and controls probably half the economy to boot, and it doesn't even have to turn a profit either. Take a state lottery payout and multiply it by thousands to get an idea of the impact. I'm not saying all the money was spent or given away badly, but I'm certain a good part of it has been.

[oranged]

Inflation happens because some idiot philosopher decided desposable capitol would stimulate the economy

[SteveA]

Quote by: oranged Inflation happens because some idiot philosopher decided desposable capitol would stimulate the economy

So true Nice insight.

[bishop]

osborn.. as i showed you in the other thread, federal courts have repeatedly ruled in favor of fiat. the plaintiffs in these cases argued that fiat was unconstitutional - the court rulings have stated that fiat IS constitutional. see, the way things work in this country is something is unconstitutional in the real/legal sense only if a federal court rules as such. so, your argument that fiat is unconstitutional flies in the face of the facts - it is an opinion and nothing more than that.


steve, you understate the effects of deflation under gold steve.. it helped produce 8 major economic panics/depressions. that IS a problem that you consistently attempt to minimize. we haven't had any such problems under market-controlled fiat.

there's also no need to tie our currency down to any weighted average. i'm not even sure that is possible at this point - the global economy has grown by huge leaps and bounds since we left gold, have global gold supplies grown in kind? nope.. so, to switch back to some weighted average means, just like it did during the gold days, that we will have to lower economic production (eg. gdp) to match the available money supply. great recipe for a depression.

also, switching back to a weighted average ignores how the international financial system actually operates. every day, over $2 trillion is traded on the forex. to put the size of this system into perspective, our gdp is roughly $12 trillion. when these people analyze and trade currencies, they don't give one iota about its value vs. gold. the interest parity schemata (including expectations) is
how currencies are valued. currencies are valued, more or less, similar to how stocks are - by the market. investors used to do something similar during the gold days, although it involved speculating on gold prices - and when the speculative bubbles popped, gold would plummet producing deflation and economic depressions.

[Osborn F Enready]

Bishop said:
osborn.. as i showed you in the other thread, federal courts have repeatedly ruled in favor of fiat. the plaintiffs in these cases argued that fiat was unconstitutional - the court rulings have stated that fiat IS constitutional. see, the way things work in this country is something is unconstitutional in the real/legal sense only if a federal court rules as such. so, your argument that fiat is unconstitutional flies in the face of the facts - it is an opinion and nothing more than that.

I say:
And if the supreme court says the color blue will from now on be referred to as purple, would you do it just because they said so? Would you see the logic in it, just because they said so? Would you not question anything, and just amble on down the road with a new meaning of the system of color?

That is my point, NO, you wouldn't because there would be no logical process laid out for its reasoning, feasibility and no matter how you cut it, blue is blue.

Well, the Gold Standard is much like that. The Constitution set specific rules, the courts decided they could re-interpret the document, and changed it to suit the powers that be, and I would bet for a price. It is the peoples fault for ALLOWING IT. That is why it is still ruled constitutional, and the challengers are coming on more than ever now, thanks to the internet and shared information.

[bishop]

yeah.. that's great. i chock it up as the same as anti-abortion people saying that roe v. wade was unconstitutional..

[Autolykos]

Quote by: SteveA I wish I knew how to make this a poll. It would be fun to see what people think, but I have a simple way to show that inflation is not inevitable. We all know that housing prices climb, or oil prices continue to rise, precious and non-precious metals alike tend to increase in value also. We call that inflation. Dollars are conintually being drained of buying power. So is there any way people could avoid this? Yes, and it's obvious. Pick almost any of these commodities and define a dollar as being a title to own a certain amount of it. Then as those prices increase so does the value of your dollar. You could remove some of the random fluctuations by mixing a few items into the value so changes of any specific item wouldn't have a large influence on the overall value. Not only would this remove inflation as an issue but such prices are easily more stable than the current dollar, even in the short term (which helps people plan their savings or businesses predict expenses and profits etc.) Imagine not needing to plan your retirement on a guess of what the dollar would be worth 30 years from now but knowing that the prices of things would remain relatively similar as they are today, instead of needing to save a million to cover the costs of inflated future goods.

To put it simply, the origin of inflation is government.

Milton Friedman once said, "Inflation is, anywhere and everywhere, a monetary phenomenon". In other words, inflation is when the money supply increases, whether through literally printing more dollar bills or through creating more credit. What you see as prices rising are really prices simply adjusting to the increased money supply.

Unfortunately, inflation does not affect everywhere at once. Those affected earlier stand to benefit; those affected later stand to suffer. (Here I'm mainly quoting Ludwig von Mises and the rest of the Austrian school.)

Combine the above with the fact that, since coinage was first invented by King Croesus of Lydia circa 600 B.C., governments have sought to control the creation of currency. In our "advanced" age, almost every national government has a monopoly over its currency. Also, almost every country has some positive rate of inflation. Is this a coincidence? Probably not. After all, if the government has a monopoly over money creation, then it stands as the first to gain benefits by default if it decides to create more money. In other words, ladies and gentlemen, inflation is yet another form of tax -- another way for those in the government to enrich themselves at our expense.

To answer your question, then, inflation is certainly *not* inevitable as long as a government does not have a monopoly over creating money.

- Rob

[SteveA]

Thank for all the posts, guys.

To answer your question, then, inflation is certainly *not* inevitable as long as a government does not have a monopoly over creating money.

Bishop even agrees as well because he mentioned prices actually deflating to some extent with a gold currency. So it's unanimous - inflation is not inevitable/unavoidable - it's just a characteristic of measuring value with a yardstick that continually gets smaller (a.k.a. the dollar).

Once again, I want to emphasize that gold itself doesn't have much inherent value other than it being a convenient currency, rare or useful for jewelry etc. and I wasn't trying to specifically encourage people to use gold again but it would remove a lot of potential abuses of our currency.

The relative price of one thing compared to another will always change, so no matter what form a currency takes, prices will vary, but we can at least remove theft out of the equation so our earnings aren't constantly taxed, like you said, Rob.

[Milton Bradley]

Quote by: SteveA Thank for all the posts, guys. Bishop even agrees as well because he mentioned prices actually deflating to some extent with a gold currency. So it's unanimous - inflation is not inevitable/unavoidable - it's just a characteristic of measuring value with a yardstick that continually gets smaller (a.k.a. the dollar).

We should have another thread about how this is the proper way to find the exact measure of your disenfranchisment. (starting at the creation of the Federal Reserve Banks)


I think people would be interested to know what that dollar they hold should really be worth.

[bishop]

there are better ways to prevent the abuses of fiat while maintaining the benefits of fiat. fixing it to commodities is not one of those ways.

fiat in itself is not the problem, the abuses are the problem. as i've repeatedly said, push through a constitutional amendment requiring balanced budgets. when uncle sam doesn't need to finance his $200+ budget deficit, that's $200 billion in unnecessary dollar-denominated assets that won't be floating around somewhere - thereby negating the inflationary effect that would've otherwise resulted. push policies to encourage savings and investment.. possibly even institute a VAT.

there is more than one way to address the problem of long-term inflation than weighing our currency down to valuable commodities.. the commoditization approach could solve the inflation problem, but it will also reintroduce the problems inherent in the gold standard - wild price volatility, strong deflationary tendencies, and an inability to manage an economy out of a recession (and avoiding a depression), lowering investment incentives, etc.. call me crazy, but that just feels like trading one inefficient system for a less efficient system - or at least one just as bad. (i happen to believe a "gold standard" to be a more inefficient system.)

it seems to me that the anti-fiat people here aren't all that interested in acknowledging that there are real drawbacks to fixing exchange rates and basing currency values on commodities (which are themselves extremely inflated). i've done my own homework on the conversion from our current, debt laden, fiat system to something tantamount to a hybrid gold standard.. (i'm getting a master's in finance/economics) - the pros of fixing exchange rates to commodities are far outweighed by the cons. this issue is much more involved than long-term inflation rates - which virtually all of the anti-fiat people here have decided to fixate themselves upon.

[Milton Bradley]

To me, its more about following the damn rules that exist. Damn I'm tired of everybody making excuses for the government to break the laws. People are always advocating these workaround solutions instead of focusing on the fact that these lying bastards are breaking the laws. Find a workaround for problems that exist in the legal operation of the money system, and stop trying to complicate an already proven tool for the disenfranchisment of the ignorant. If you are such a great economist, solve the problems in a way that restores the peoples voice, and get private interests out of my treasury.


The reasons that the rules existed is clear. The reasons that people such as yourself advocate breaking those rules remains a mystery to me. Where are your ethics man?