Is inflation inevitable?

[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.

[asterix404]

There was something called the gold standard. This is a VERY bad idea. If you tie the value of a dollar down to an object all a country who really hates us has to do it dump a ton of that product on the market and we get screwed. VERY VERY bad idea. Also a country has to have enough of this object to be able to convert these slips back into product. Silver certificates you can redeam in silver which makes them worth about 7x their face value. A friend of mine who is a libratarian had this brilliant idea of going back on the gold standard unfortunatly there is a problem... this idea would mean that every bank in the US would have to have enough gold to redeam all the money that is currently saved and in cirulation. Any way, even if there was that much gold all someone would have to do is pump gold to the price of copper and well... At least this is how I understand it.... I also rememebr that controled inflation is a very good thing for the eco since it means stimulated growth... and I don't know enough about that to be much use... could someone fill me in?

[bishop]

there has always been inflation.. way before our country was a brainfart in some brit's head.

inflation was more volatile, and consequentially, more damaging, under the gold standard.

[SteveA]

There was something called the gold standard. This is a VERY bad idea. If you tie the value of a dollar down to an object all a country who really hates us has to do it dump a ton of that product on the market and we get screwed. VERY VERY bad idea.

That's not possible. It's propoganda. The exchange rate was fixed. It would be the same as saying that someone might try buy all our gold!

You can't do it because if the rate of exchange had remained the same, a dollar would have been no different that a fixed amount of gold.

What happened was when they printed up too many dollars and people wanted the gold back, the game was up as they started running out of gold, so they said foreigners had bought up all the gold, but that's plainly impossible if they had trustfully remained on a dollar standard. The underlying problem is the ability to counterfeit paper - and this can be done by government as well.

Well, anyway, it's too late to fix the damage already done but you don't even need to use gold. You can use most anything that has some enduring value, as I mention above or even a combination of them. Most non-paper values don't deteriorate.

Back in 1970, Hershey bars were ~10 cents.
Oil was at $4/barrel.
From what I remember, housing prices were around $15,000.
Gold was at $20/oz. I believe

So let's see how a Hershey bar "dollar" would fare compared to a dollar:

Hershey Bars are now around $1.50
Oil is around $66/barrel
Housing prices are around $300,000
Gold is around $450/ounce.

So back in 1970 we'd have around 40 barrels of oil per hershey dollar.
And in 2005, we'd have around 40 barrels of oil per hershey dollar.
(OMG, we're going to hit Peak Chocolate soon!)

In 1970 we'd have around 150,000 Hershey dollars for a house.
In 2005 we'd have around 200,000 Hershey dollars for a house.

In 1970 we'd have around 200 Hershey dollars per ounce of gold.
In 2005 we'd have around 300 Hershey dollars per ounce of gold.

So the Hershey bar dollar or the gold dollar or the housing dollar (or likely the frozen pork belly dollar or the nickel dollar or the coal dollar etc. etc. etc.) performing similarly in not being affected by inflation.

As a side note, look at oil prices versus other commodities. If we were really having problems with oil we'd see a growth in the labor requirements to find it and extract it. If it were truly becoming scarce, you'd expect the prices to rise faster than other things.

30 year historic price of oil
http://www.oilnergy.com/1onymex.htm#since20

5 year historic chart of nickel prices
http://www.kitcometals.com/charts/ni...cal_large.html

Nickel is similar over the last 5 years (I couldn't find a 30 year graph but I'm certain it's similar)

Peak Oil is as likely as Peak Chocolate and Peak Nickel!!

I'm partly kidding but the general implication seems true to the claims that alternate energy sources are more than able to substitute for oil, as oil becomes scarcer.

Think of oil, not as a specific irreplaceable resource, because that's not really the value of it. It's valuable as an energy source. The value of oil prices correlate with the cost of energy, and energy prices have remainded relatively costant. No, not constant compared to the dollar but relative to most other physical resources.

As alternate energy sources are developed and their cost/KW hour lowers, oil will eventually become obsolete.

there has always been inflation.. way before our country was a brainfart in some brit's head. inflation was more volatile, and consequentially, more damaging, under the gold standard.

I'll agree that's what they taught us in school.

[bishop]

what matters more? the exchange rate or inflation? inflation obviously.. and it was much more volatile under the gold standard despite exchange rate stability.

[Milton Bradley]

Quote by: bishop what matters more? the exchange rate or inflation? inflation obviously.. and it was much more volatile under the gold standard despite exchange rate stability.

I don't see legality listed, so I couldn't vote.

[SteveA]

what matters more? the exchange rate or inflation? inflation obviously.. and it was much more volatile under the gold standard despite exchange rate stability.

They both play a factor but both are improved when you use a basket of goods as the reference instead of an artificial standard, created by government.

I already showed you the benefits in stability but consider when the Great Depression occured ... before or after government denied people from trading gold?

The Great Depression occured after government took peoples gold and created the "Gold Standard". Shortly afterwards, people found out their money had been robbed as the government defaulted on its commitment (the typical view is impossible if the banks had truly stocked the gold ... noone has ever been successful in cornering a metal market entirely) ... and the Great Depression ensued due to government interference with our monetary system. Check the dates for cause and effect, don't rely on schoolbooks.

How can you deny that a basket of mixed goods as I showed above would be any less volatile that the dollar, which has changed in value to 5% of what is was then.

The dollar's performance has been equivalent to buying 22 such commoditees and having 21 out of 22 of them become entirely worthless!!! It's impossible to create such a worthless standard of value without laws forcing people to accept it.

It's even intuitive as well, because each product requires a certain amount of labor and resources to create. When you use those as a standard, you're basing the value on general productivity and man hours in the economy, which are much more stable in value than an unreferenced number that could be altered almost at whim - like, you can reprint the packaging on a candy bar and make it worth 20 dollars. (The've named candy bars after money before but they were still worth the same thing - so they have a safe stable and uninflatable value)

Of course people don't actually need to trade these goods but can instead trade ownership and an ability to exchange them for oil, chicken or houses etc. The trick to denying inflation from ruining a currency is to tie it to something of tangible value and then people can retire or forecast expenses much easier.

[SteveA]

Ok one more quick example to show why the dollar is so volatile:

Let's assume the feds increase or decrease an interest rate. This may or may not affect the money supply. The underlying issue is how many people are borrowing money.

If a short term increase in demand for borrowing dollars occurs a large increase in them is easily created by the central banks ("printing up money"). So paper wealth is created via mere social perspectives and the intregity or lack of it in central banks.

The value of a wide range of physical products to people is much less subjective. A house provides a relatively fixed amount of comfort and value to people, no matter what the exchange rate to a dollar is.

Are houses really physically worth more now than they were 5 years ago? Obviously not. So people aren't "richer" in any tangible sense now than they were 5 years ago. In fact, it's easily argued many people are less "rich" now because so many have had loans taken out to buy homes, so the percent equity people have in their homes has very likely dropped in the last 5 years.

So despite the increase in housing values, people actually own a smaller percent of their homes, while banks own more.

Also, property taxes have increased along with this. Inflation tends to push people into higher tax brackets and sure enough if people aren't forclosing on loans at a record rate (I don't even have to check the numbers to verify this stuff really. There's really no other way things could go).

So consider all those things when you believe the dollar is a stable reference of value. Oh and check out the currency they had in Iraq and see if that has remained stable as well. But I'd bet food, houses, car and gold are still respected as valuable in Iraq.

[bishop]

the monetary changes that preceded the great depression were in response to a series of economic crises occurring under the gold standard.

it goes without saying that exchange rates were more stable under the gold standard.. however, inflation was not - particularly nominal inflation. people make a big stink now about oil prices going up a couple cents/dollars.. that's nothing like the sort of inflation americans experienced under the gold standard. food prices, for example, have been historically volatile - and were even more volatile under the gold standard. also, while it grew slower than under fiat, real inflation also increased under the gold standard - so, the real answer to the question ("is inflation inevitable").... yes, we've always had inflation, under gold and under fiat. that question's a no brainer.

maybe you want to debate whether or not it's desirable to have nominal inflation stable or volatile? deflation is often ignored by gold standard advocates. why that seems to be the case is beyond me, since deflation is often MUCH more devastating than inflation - and much more difficult to resolve.

[ghost_stalker]

Inflation is ineviteble in a thriving economy.

The reason for this is because in a thriving economy compaines will give thier employees raises due to the profit generated from sales, and once the compnay raises wages for ther employees the also increase the price for the products or services they sell. Thus creating inflation. Now when one company tends to increase wages and prices other compaines do the same to compete with the increased profit of the competing company and to prevent loss of workers due to better wages elsewhere.

[SteveA]

First off, let me say I don't feel gold alone would be an ideal currency. It's just better than out current dollars.

But back to volatility and inflation.

it goes without saying that exchange rates were more stable under the gold standard.

Yes, if we had made a currency of an equal mix of some non-precious metals (I'll use copper, nickel, lead and zinc), our currency would have gained 74% value and the exchange rates would look like this:

Copper +105% versus dollar, + 18% versus mixed currency
Nickel +94% versus dollar, +11% versus mixed currency
Lead +91% versus dollar, +9.8% versus mixed currency
Zinc +7.4% versus dollar, -38% versus mixed currency
U.S. Dollar +0% versus dollars, -43% versus mixed currency

So the dollar underperformed every one of them and was the most volatile relative to the mixture as well. I wanted to include other things like cotton, or lumber etc. to make it cover a wider variety of commodities but I had a hard time finding historical data, though I did find an interest site:

Historical records of prices from ~350 BC.
http://www.iisg.nl/hpw/index.html

I won't bother calculating the stuff out but considering the dollar hasn't existed for much over 100 years and has already lost 95% of it's value, 2350+ years ago silver was still traded.

Anyway, we all know this stuff. So why did the Gold Standard fail after it was created? Because it was a paper money system. The typical story is that foreign countries bought the gold, but that's an obvious lie. If the reserve held 1000 units of gold and 1000 shares were issued, every single issue would still be exchangeable for gold and there would be no threat to having the money lose value.

But if instead they printed up 2000 shares for only 1000 units of gold, then once some people begin wanting their gold back, the reserve quickly dries up and people find they were cheated out of half their money ... of course the money was stolen by foreigners though (which likely we had to go war with too Just kidding).

the monetary changes that preceded the great depression were in response to a series of economic crises occurring under the gold standard.

We used gold before the Gold Standard was implemented. The Gold Standard was the creation of the dollar, just named differently. Many people opposed the creation but those who resisted this eventually lost and the Federal Reserve was created in 1913 with our currency no longer physically tied to gold, but mere paper, with the Great Depression as a result after banks around the world began folding because they were "printing up" too much money and much wealth was effectively stolen and we had WW I and WW II ... and guess where all the money to pay the armies came from.

People assume the Gold Standard refers to using gold for trade. No, it refers to people trading paper. We'd used gold long before this without a worldwide economic collapse of the magnitude experienced until most the trade was done through paper and banks, and merely good faith.

Now, I don't know if any of what I've said is true, I just made up and guessed at half of it, but the timelines match, the cause and effects make sense under this scenario and the historical complaints seem to match as well. It seems much more realistic than gold lost its value or foreign countries stole our gold or the very funky one I heard in school was that production was too good and people didn't need to buy much, which caused an economic slump (that's some of the wierdest dang thinking I've ever heard of - we made too many good products, so became poor LOL! It's about as silly as when people talk about "putting the brakes on an overheating economy").

Feel free to correct me on any of this if someone has a better explaination. (Again, yes there are potentially better currencies than gold but it's still better than the dollar)

[SteveA]

Inflation is ineviteble in a thriving economy. The reason for this is because in a thriving economy compaines will give thier employees raises due to the profit generated from sales, and once the compnay raises wages for ther employees the also increase the price for the products or services they sell. Thus creating inflation. Now when one company tends to increase wages and prices other compaines do the same to compete with the increased profit of the competing company and to prevent loss of workers due to better wages elsewhere.

No, when physical commodities are used as the currency, technological advatages increase their production as well so the ratio between currency/commodity and product remains the same (or relatively similar with no long term inflation like trend, only shorter term ratio changes). So far example:

Let's say in 1950 a man hour of labor could create 1 unit of currency or produce 1 unit of product.

In 2005, with technological gains, a man hour of labor might produce 3 units of currency or 3 units of product. So, yes, a person receives 3 times as much pay but the cost per unit of product is the same, so prices don't increase.

To use a real example, let's just take the hershey bar dollar currency and oil again. In 1970, it was more difficult to create both of these, but the ration in labor and resources was still similar.

So maybe a man could make 5 hershey bars per hour in 1970, or make a barrel of oil in 8 hours with the ratio being 40 to 1.

In 2005, the same man could now make 10 hershey bars per hour or make a barrel of oil in 4 hours. So his productiviity has doubled as well as his pay but there is no inflation. He can still buy a barrel of oil for 40 hershey bars. So prices stay the same and inflation is removed - basically a gold dollar in 1950 buys the same thing in 2005 just like the value of a hershey bar, a house or oil remains the same (for most intents and purposes). Dollars lose value because banks print them up like sand (likely noone even had 1 billion dollars in 1910 and the population was smaller as well, they've devalued the dollar in half, about 4 1/2 times. Imagine being able to take a large chunk of the worlds savings and spending it 4 times over in a period of 100 years or so ... that's the power of the banks ... not to mention additional power granted via. taxes. And you likely wonder why we both work for heavily regulated and subsidized government industries - that's why. Except I quit).

[SteveA]

that's nothing like the sort of inflation americans experienced under the gold standard. food prices, for example, have been historically volatile - and were even more volatile under the gold standard. also, while it grew slower than under fiat, real inflation also increased under the gold standard - so, the real answer to the question ("is inflation inevitable").... yes, we've always had inflation, under gold and under fiat. that question's a no brainer.

Well then if the standard were futures on foodstuffs, we wouldn't see this inflation, so it couldn't be inevitable.

Regarding volatility, Consider the reason why food prices were historically more volatile was not due to rapid value changes in the currency but due to seasonal changes in agriculture and crop yields.

Modern technologies and transportation allow us to store, preserve and redistribute foodstuffs to match worldwide markets efficiently and smooth out supply variations.

We can now even transport foods from the southern hemisphere when it's winter in the northern hemisphere. So we are much less reliant on the local farmer having a good crop this season to determine food prices and farmers back then didn't have much beyond grandpa's arthritis to predict the weather either

Now compound all that with an economy being replaced by paper value under the Gold Standard and the ensuing bankruptcies and yes, you'd see large amounts of inflation and volatility in food prices.

Though food prices aren't very volatile now, with a commodity based currency you could actually average in some futures values on foodstuffs as well - just a stock portfolio. So you could almost view is trading redeemable stock certificates instead of paper with no physically backed value behind it.

Another idea I'd heard of was a currency based on land - each "dollar" effectively represents some fraction of an acre, and you could redeem them for land when you wanted. Such a currency would have a very tangible value and be very unlikely to lose value (people always want land). Fun idea!

[bishop]

i don't exactly see the point in talking about the dollar's loss of value by comparing it to its original value... you haven't made any connection between that and inflation.. plus, the comparative values of our currency seem awfully relative. if your "lost 95% of its value" line was actually accurate, we should be paying a couple $hundred for a loaf of bread, which definitely isn't the case.


and by saying that using the gold standard, you must also think that nominal price volatility isn't a big deal - since this is a core characteristic of the gold standard. specifically, it's okay if we open ourselves up to the threat of deflation, or rapid inlationary changes approaching 10% in one year... real inflation under the gold standard was about 2%, while real inflation under fiat has been about 3.3% per annum... not exactly a huge difference unless you're using a century for your timeline. we under fiat, however, we haven't experienced the sorts of nominal price volatility that was characteristic under gold.

[SteveA]

i don't exactly see the point in talking about the dollar's loss of value by comparing it to its original value...

I compared each against the dollar and the mixed non-precious metal dollar to show their relative worths. Of course a dollar can't inflate against itself, so that's why I showed it a 0% increase.

you haven't made any connection between that and inflation..

Here's let's grab a dictionary:

in·fla·tion Audio pronunciation of "inflation" ( P ) Pronunciation Key (n-flshn)
n.

1. The act of inflating or the state of being inflated.
2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

So in the mixed metals currency above, the prices of the mixed metal currency increased versus the dollar - they inflated in dollar prices but not with respect to themselves. A mixed metal currency could likely still buy a similar amount of those metals 100 years from now because it's value is tied to them. It so happens that many physical products tend to be tied like this because they share common labor and physical resources to create as I showed above.

Ok, here's a more clear example to show this:

Let's say you had a currency where 1 dollar was 10 pounds of lumber.

Now look at the value of this currency over time versus housing prices.

A house requires lumber to create. So if a house required 10,000 pounds of lumber to build that would equal to $1,000 "dollars" of lumber.

It wouldn't matter if you were building houses in 1905 or 2005, except that technological changes could affect the amount of lumber needed, but lumber has other uses in any event.

So a house in 1905 would cost 1,000 lumber dollars and if someone saved 1,000 of those lumber dollars, they could still likely buy a house for it in 2005 (likely the price of houses would actually deflate because we've come to use lumber and labor resources more efficiently ... so possibly the money would be worth 2 houses in 2005).

Lumber is not a good medium of exchange though because it deteriorates over time and would be difficult and expensive to maintain a pool to back savings, but consider that only a small part of our wealth is actually in savings so you don't need to back the entire economy, just peoples savings but still this is why metals have been used, because they don't lose value over time.

plus, the comparative values of our currency seem awfully relative. if your "lost 95% of its value" line was actually accurate, we should be paying a couple $hundred for a loaf of bread, which definitely isn't the case.

So you're saying bread used to cost $10 in 1970 or so? $200 * (100%-95%) = $10.

I think you did the math wrong somewhere.

I'd hazard a guess a loaf of bread was at most 10-20 cents around 1970, which would correlate to $0.10/(100%-95%) = $2 now if it inflated similarly to most other things.

[bishop]

it's all relative.. bread costs more now than in 1970, but people also make much more than workers in 1970.. this example of yours, using historical prices/values as a basis of comparison, simply does not hold water.

[SteveA]

Quote by: bishop it's all relative.. bread costs more now than in 1970, but people also make much more than workers in 1970.. this example of yours, using historical prices/values as a basis of comparison, simply does not hold water.

Ok, let's resolve this discrepancy in bread prices and see which side of the debate doesn't hold water. I claimed it was likely 10-20 cents. You claimed it was $10 (indirectly by saying it should be ~$200 now)

... searching internet for bread prices in 1970 ...

Ok, bread was 24 cents/pound in 1970. Pretty close to my estimate. So I was likely wrong by less than a factor of 2 (your estimate was off by likely a factor over 500).

Here's the site I found:

http://www.infoplease.com/ipa/A0873707.html

If you want to verify if for yourself.

Look at the other items there and notice that they all track each other in price relatively well over time. The common (devaluating) denominator is that they are all compared to a dollar, which loses value over time and makes them seem to increase in value but a pound of bread, or potatoes etc. is about as valuable today as it was in 1970 (or earlier).

Inflation is entirely unnecessary and harmful.

[bishop]

actually, i just randomly selected the $10 figure.. i didn't realize i should've thrown in a qualifier for those who took that statement seriously.. the point of that statement was that while bread was cheaper back then, people also made much less money. bread costs more now, but people make more. the fact that you haven't included wage increases shows your argument to be pretty hollow, which is why i said that it's all relative.

it is true that when wages are included, that items cost less in real terms during the gold standard.. of course, supposing we kept the gold standard, prices in 2005 would still be higher than in 1880 because the gold standard didn't eliminate inflation. so yes, answering the question - inflation IS inevitable.

one thing that we haven't experienced under fiat has been the price volatility characteristic of life under the gold standard. specifically, we haven't had the kind of deflationary pressures under fiat. and when the economy experienced these problems, there was nothing that anyone could do about it. it's just like seeing a fire, but not having any water/sand to put it out with. just gotta hope it eventually fizzles out before it burns the whole block down. the reason why we didn't end up with another great depression in 1987, for example, was because the fed was able to increase money supplies. the fed didn't do this during the great depression.

there is no magic bullet, although a constitutional amendment requiring balanced budgets would be nice.. the fact of the matter remains, that under the gold standard, we were regularly subjected to deflation which produced huge problems for the economy. at its worst, inflation produces unemployment and sucks away our ability to consume.. deflation on the other hand produces much more serious and difficult to resolve consequences. if i had to choose, i would pick inflation over deflation any day of the week.

since you are advocating gold, you should at least talk about or acknowledge the deflationary characteristics of that system. that's an extremely significant topic, and it would be very disingenuous to ignore it.

[SteveA]

actually, i just randomly selected the $10 figure.. i didn't realize i should've thrown in a qualifier for those who took that statement seriously.. the point of that statement was that while bread was cheaper back then, people also made much less money. bread costs more now, but people make more. the fact that you haven't included wage increases shows your argument to be pretty hollow, which is why i said that it's all relative.

I've shown how wage increases don't lead to inflation many times so far.

Look at the "lumber dollar" to see why such currencies don't inflate, even if people become 5 times as efficient at creating lumber.

It's simple, 100 pounds of lumber has a similar value versus a house whether or not someone is able to acquire 5 or 50 pounds of it an hour. (So sure, people didn't earn a lot of money a long time ago but prices wouldn't increase over time so at least the money would still have a relatively similar buying power).

it is true that when wages are included, that items cost less in real terms during the gold standard.. of course, supposing we kept the gold standard, prices in 2005 would still be higher than in 1880 because the gold standard didn't eliminate inflation. so yes, answering the question - inflation IS inevitable.

The Gold Standard was the beginning of the dollar. Yes, the dollar inflates. We already know that. Here's a picture of what a dollar when then Gold Standard was created looked like:

http://en.wikipedia.org/wiki/Gold_certificate

Now you tell me if that looks like gold or paper?

Of course paper becomes worthless. You couldn't redeem one of those for gold anymore, so yes, it's a bad for of currency as I've said.

But before that people actually used gold or silver coins or bartered too. Now it's more clunky but it has the value that it doesn't become worthless, in that a real gold dollar back then is a good sized gold coin and very valuable still.

You've heard the stories of people carrying wheelbarrows of money to try to buy something with the paper. Hint, noone can pring up wheelbarrows of gold and abuse the faith of the system. Also, you magically create money to pay for a war or buy up half the economy with money that wasn't based on anything of value to people, except legal tender ("good for public and private debt: a.k.a. you legally have to accept paper in payment).

one thing that we haven't experienced under fiat has been the price volatility characteristic of life under the gold standard. specifically, we haven't had the kind of deflationary pressures under fiat. and when the economy experienced these problems, there was nothing that anyone could do about it. it's just like seeing a fire, but not having any water/sand to put it out with. just gotta hope it eventually fizzles out before it burns the whole block down. the reason why we didn't end up with another great depression in 1987, for example, was because the fed was able to increase money supplies. the fed didn't do this during the great depression.

Deflation isn't necessarily bad. It just means the costs of items are dropping - something that occurs naturally as technological gains are made. To expect houses to remain at a cost of $300,000, if people could build them with less labor isn't realistic. The prices should drop as less resources and labor are used to create them. If prices don't continually go up, but instead varying up and down over periods of time without large increases either way, (as you'd see with a tangible based currency), it encourages savings and people can plan whether or not they can afford to buy a home because wages and cost of living remain more stable and predictable and even if housing prices were to deflate, that's actually good for most everyone because it means housing requires less resources to create. The only issue would be that if houses were easier to make, some people wouldn't find enough profit in it and move to another field - all fine and natural under a free market - and efficient too. Deflation is a good thing in that it means real physical wealth is easier to create. (Though again, just like the dollar, things inflate or deflate relative to something else, you have to divide the cost of one into the other, mathematically to determine the ratio, so am oz. of silver might have taken 10 hours to acquire in the past whereas it takes only 1 hour now, the wages have effectively increased 10 fold in this example, but the oz. of silver (currency value) retains relatively the same value versus other things)

there is no magic bullet, although a constitutional amendment requiring balanced budgets would be nice.

Agreed but there's not even such a need to do this with a currency of tangible value because noone can print up silver, oil, cars or chocolate, and if they could, more power to them. They'd be rich.

the fact of the matter remains, that under the gold standard, we were regularly subjected to deflation which produced huge problems for the economy.

I must admit this sounds like pure propoganda. What banking institution would want anyone to think deflation is good? What that would mean is that they'd have to have a balanced budget effectively, and that means they couldn't play money games.

If the money supply had stayed relatively fixed, prices would actually drop because more and more products would be available using less and less money per product. The cost of items would actually experience a decrease as less and less resources were used. Yet people would be paid a similar amount of money (though population growth would divide the savings).

I can't really explain all this easily but honestly having a fixed money supply isn't bad at all. It's actually a good idea in many ways except it's virtually impossible to achieve in reality.

Ok, look at it this way - why is 3% inflation a year a good thing or maybe 1% inflation good, but maybe 10% inflation bad and 0% inflation bad or even -3% inflation bad? It's a game they've been playing for a long time. Inflation is bad because it devalues the money people save, so they don't want to save. Savings is good because someone produced something and doesn't need it, they send their products to someone else to use, who can likely benefit from it, while not spending their money and taking products from other people. If there were a large amount of deflation people could effectively invest in the economy and receive interest from their investment, just like the stock market.

If you want to look at it, stock certificates are a currency under which prices tend to deflate because the value of the certificates increases over time and it takes fewer such certificates to by something in the future. So if a dollar was a stock certificate for a company that slowly grew, people would tend to want to leave their investments in the company instead of spending them. That's not a bad thing at all because other people are efficiently using those resources to the mutual benefit of both/all parties.

The whole deflation is a problem thing is a myth. If that were true, we wouldn't find any economic benefits to having a stock market. Of course it might be possible to think of a scenario under which deflation of a specific currency versus another might appear problematic but I'll stick to basics here.

[SteveA]

(... continued)

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