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Thanks for the in depth discussion of these important issues. Many people miss the point that increasing the amount of money doesn't cause inflation if this increase is countered by a decrease in velocity. Hopefully Ben can sop up this excess fast enough when the velocity does start to increase.

As to the gold coins in Atlas Shrugged: Currently only 3% of the US money supply is actually in cash. Of course electronic transactions aren't hindered by the size of the coins. Also, you don't need a fiat system to handle the shrinking coin problem. Just use warehouse receipts, i.e. paper redeemable for gold. Although it is paper, it is not fiat as they are backed by gold in a vault and not the "full faith" of the local government.

Mike,

Good points; but paper redeemable for gold (a) is not what Ayn Rand described, possibly because (b) it's the beginning of the process that leads to fractional reserve banking. Those entrusted with gold deposits soon realize that, nearly 100% of the time, 10% of the gold is sufficient to satisfy depositors who want to redeem their paper for their gold. That's when they start creating "bank" money (from thin air) by lending out more paper than the gold they have in the vault.

The phrase "money from thin air" is a pejorative; but it means precisely the same thing as "money based on 2-way trust." Whether it is fractional reserve banking backed by gold, or by base money "printed" by the Fed, it is TRUST that underlies the entire system, NOT a shiny metal that has been hard to mine, seashells that have been hard to dive for, beaver pelts that have been hard to collect, or Marlboros that have been hard to counterfeit.

And if the gold bugs' true, underlying complaint is against fractional reserve banking... well, that's a different argument, and one that they'll have an even tougher time winning.

Are the Republicans really concerned about the economy, or rather, concerned that the economy might improve before November 2012?

Great article, however, I seem to understand the threat of deflation differently. It is my understanding that deflation causes a feedback loop in which consumers postpone consumption due to the expectation of lower prices in the future which in turn accelerates deflation.

Although I do see traces of a feedback loop in this explanation, it seems to be focus on the inconvenience of gold coins and omits the role of expectations. More so, using the given example, I would not expect deflation to be a threat to the US economy given our current fiat money system, when in reality it can be.

A deflationary spiral is one of the fears of every central bank, because they have few tools to fight it. It can lead to double-digit unemployment, which leads to rioting in the streets, which leads to the overthrow of governments. Avoiding it is arguably a higher priority than avoiding unanticipated inflation (against which the central bank has tools to fight). Deflation is the other form of currency instability, but because it is so historically infrequent compared with inflation, we hear little to nothing about it. Nonetheless, the central bank's job is to avoid both deflation and unanticipated inflation -- even though we hear little else from the fear-mongers besides the inflation mantra.

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