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Watch out for a wave of gold-bug comments after this post- they tend to live in the underground tubes of the internets.

Yep! "But if we had been on the Gold Standard, we would never have got into this mess in the first place".

I'm a bit more scared of the economic historians, in case I have made some terrible history mistake (the one subject I failed in skool). But they could also add something useful, if only to say whether I have got the basics right.

We may be in for a WCI vs WSJ cage match: Capitalism Needs a Sound-Money Foundation.

But at least we won't be fighting alone.

By 1934 all major countries had left the gold standard. The world economies grew at a good clip during the reflation period of 1934-1936. However, by 1937 the U.S. adopted austerity measures in response to inflation and debt growth fears, with the Fed reversing much of its liquidity injections and FDR cutting the fiscal deficit. The result was the 1937-1938 "mini Depression", the recovery from which did not occur until Lend Lease got underway.

Similarly, dozens of non-gold standard countries have been forced to adopt austerity measures to avoid inflation/default risk. These austerity measures, more often than not, plunged their countries into prolonged recessions, or even "Depressions" (depending on how one defines them).

Obviously, a gold standard is not a requirement for nor the cause of debt deflation. One could say the standard "made things worse", just as one could say the need to curb inflation in 1937 "made the Depression last longer".

By the way, in the 1920s the U.S. did not have a gold standard but a gold exchange standard. During the period when a true gold standard was in effect, the U.S. experienced frequent, deep, and short "small d" depressions unlike the 1930-1939 one. Again, the historical experience shows that a gold standard cannot be blamed for prolonging recessions, although one could argue it contributed to economic volatility.

Sure most gold bugs are a little nuts, but by the same token most discussion of the gold standard uses incomplete historical evidence in making its arguments. This was certainly true of Bernanke's analysis of the Great Depression.

BTW, a key point above is that the markets have imposed the same policies on dozens of governments that the gold standard did on the U.S. in 1932-33. Raising interest rates in a deep recession? This was a staple of IMF rescue plans for countries experiencing debt crises. Even when the IMF did not impose this policy, many countries have adopted it themselves in response to market pressure (i.e. in an effort to stop capital flight, which is essentially what the U.S. Fed tried to prevent in 1932).

How can so many countries adopt the very prescription which Bernanke wrote was a major policy blunder for the 1930's Fed? The answer is, gold standard or not, reflation in response to debt deflation often leads to forced austerity, gold standard or not. I suspect this will eventually be the case for the U.S..

Wow I just couldn't disagree more. The cause of the 1930's depression was the 1920's expansion combined with government intervention. It was the LACK of respect for the gold standard. When you have a bubble, letting it deflate is a good thing. That's how you hit a bottom, clean out the mal-investment and move on with your life. We don't want government to inflate its way out of economic troubles with fiscal or monetary policy, that's the whole point!!

I just don't understand how money whose value isn't tied to anything concrete is a good thing. How does it help the economy that interest rates can be fixed at whatever level the central bank thinks fit, with no relation to actual economic conditions? How is it a good thing that both the cost of borrowing and the supply of money available to be borrowed (savings) can go down at the same time? Surely no sensible economist would support such a policy for any other good or service. What makes money so special that it's immune to the laws of supply and demand?

P.S. Those are real questions, not snarky, holier-than-thou jabs. I really would like to understand the argument.

Adam: Money is tied to the national GDP and the legitimacy of the government. So unless civilization ends, we're all good on that score.

If interest rates aren't set at the 'natural' rate we either get inflation or deflation as a consequence.

Even if you don't accept these arguments, why would it be better to hand over the money supply to the vagaries of mining and the hallucinated value of a metal used primarily for adornment?

Patrick, I'm not sure I understand your first point. I think you're saying that unless civilization ends, central banks won't just start printing money. Obviously there's a strong incentive not to render your currency worthless, but it does still happen (Zimbabwe, Weimar Germany, etc.). And non-hyperinflation of the type we had in the 1970s is scary (and realistic) enough.

I don't see any particular reason why gold in particular (as opposed to something else) should be the store of value. But as opposed to what? The cost of money being set arbitrarily by a monopoly supplier backed by the coercive power of the state? Isn't that exactly the kind of concentration of power that would make us quake with fear were it to be wielded for any other good?

Adam, not just "any other good", half of every transaction. The same people who praise central banking deride OPEC, yet somehow still consider themselves rational. I don't understand why conventional economic wisdom ridicules anybody opposed to our bubble-to-bubble-to-bubble model of economics. I would think it's now obvious to everyone humans are not capable of balancing the economic house of cards on the head of a pin. Nassim Talib calls the reason the problem of induction, give his books a read and stop making fun of Austrian economists, it will be spare you some embarrassment in a few years time.

Pointbite, first of all I didn't make fun of Austrian economics. I assume you're referring to Patrick's jab at "the hallucinated value of a metal used primarily for adornment." So you have the wrong person.

Second of all, there's no need to be rude.

Actually, on second reading, I'm the one who said "any other good" so maybe you are addressing your comment to me. How you interpreted anything I said as an endorsement of central banking or the idea that humans can "balance the economic house of cards on the head of a pin" - or making fun of Austrian economics - is beyond me.

Adam: There is a demand for money, as a medium of exchange, whether it is something intrinsically valuable like gold, or not, like paper. As long as the supply is restricted, paper money can have value. We can either have the supply of money determined by the supply of gold, or by a central bank. Gold would be better than a bad central bank. But a bad central banker might not stick to the gold standard anyway.

David: thanks for the historical background. I used to know the difference between the true gold standard and the gold exchange standard, but please remind me. Only central banks could demand that other central banks' money be converted into gold?

Adam, the making fun of Austrian economists was meant as a general "you" (mainstream economists who may be reading this) not you personally. I read my comment over again and thought it would be misinterpreted, but I didn't bother to correct it with a follow. Sorry.

Adam, my comment was actually meant to support yours, not argue against you.

Nick, I agree with that last comment. The problem is not that paper money can't work, it's that people are not trustworthy. Central planning doesn't work in anything, least of all with money, something that represents half of every transaction. All central banks eventually become "bad" -- a system that only creates money out of debt can't survive without inflation, the system itself is flawed. Gold circulates permanently. That's the main difference.

Thanks Nick, but I'm afraid I still don't understand. Couldn't you write roughly the same paragraph to argue that the government should set the price and have a monopoly on the production of milk, boots, integrated circuits or zinc? Sure, if the state sets the cost of borrowing at the "right" level and prints the "right" amount of money then there's no problem. But *any* state monopoly on *any* good or service works well if it sets the "right" price and produces the "right" amount.

To the best of my knowledge, economists are in agreement that public monopolies are less efficient at allocating resources than private enterprise. How many economists would argue that the government should be the sole provider of office furniture or of legal services? Again, perhaps there is something peculiar about money that leads you to argue that a government monopoly is desirable in this particular case.

Adam: your question is spot-on. It deserves an answer.

I like to break it into 3 questions:

1. Should the government be in the money business at all (if so, why not in the milk business?)?

2. If yes, should it have a legal monopoly on money?

3. If yes (on 1) what's the right amount it should produce?

I think it's a lot clearer when you break it into 3 parts, like that. And let's answer them backwards.

3. Clearly, if the government is producing milk, it has to decide how much milk to produce, or the price it's going to charge for government milk, or the interest rate at which it will lend out government milk, or something. You can't just say (for 3): "leave it to the market". The government is one of the players in the market, and has to decide how to play. Economists giving different answers to question 3 is the whole normal debate about monetary policy. My answer is something like "target 2% inflation (or price level), and adjust the interest rate to try to hit that target as best you can".

2. (Remember, only economists who answered "yes" to question 1 get to answer this question.) Most would perhaps say yes, the government should have a monopoly. I'm a bit weird on this one, because I would answer "no", and I don't think the government in fact does have a legal monopoly on money either (in Canada, and most countries). I think "legal tender" laws do not in fact restrict competition.

3. Most economists answer "yes", arguing that money, unlike milk, is a natural monopoly, because people gravitate to using the same money as other people around them, and natural monopolies are often best handled by government, and money especially so, since it pervades the whole economy. A minority would answer "no", and say money should be produced by competing private firms. My answer is weird. I answer "yes", mostly on the following grounds: if government were making a profit producing milk, and did nothing to prevent private firms producing their own milk (as long as it were clearly labelled as non-government milk, and not infringing on the government's brand name in any way), then what's wrong with government producing milk? Same with money.

Adam: I hope I get the details right, I'm not an economist...

My first point was (ineptly, I suppose) trying to address the claim that fiat money has no axiomatic underpinnings; it isn't convertible to a 'thing' with intrinsic value. My somewhat snide remark about gold was intended to highlight that gold has value in large part because we think it does and not because of any intrinsic properties (other than it's pretty and somewhat rare).

I would argue that fiat money does have underpinnings: a legitimate government with the legitimate power to tax designates the currency as being the medium of exchange that it backs with 'full faith and credit' (meaning the gov't will take the currency, pay you interest, and always give you your principle back). Thus, in a sense, it is the wealth of the nation and the Government's legitimacy that backs the currency as a store of value. Hence my comment about civilization ending.

I don't know much about the German hyperinflation, but I think part of the problem in Zimbabwe is that the government long ago stopped being legitimate AND they crushed their economy AND they have terrible central bank policy. Zimbabwe would probably be better off under the gold standard until they sort out their country. But Canada, the US, Europe, etc are not Zimbabwe.

I agree that bad central bank policy has the potential to create problems. They can potentially expand or contract the money supply in ways that create terrible problems. I view this as more tractable than the problems associated with the gold standard. For example, the discovery of a big gold deposit would terrible consequences for the currency! That, to me, seems to be a really bad system.

My political views are such that I don't have a problem with the Canadian government and its power to tax being part of what underpins of the currency. In my view, it provides incentives and creates a responsibility for the citizenry to be educated and to participate in our democracy. Obviously, not everyone agrees on that front. Especially Libertarians.


There is no such thing as government both selling milk and not preventing private companies from selling milk, they are taking away customers, that may not drive out all competition but it will drive away more than zero. Especially given private industry must take risk with private capital, whereas the government takes risk with (for all practical purposes) unlimited tax dollars. It's a totally different dynamic. Ask anybody who has to compete with the BDC how government changes the playing field when it interferes.


Of course fiat money has underpinnings, if the government decides to accept apple cores as payment for taxes they will create demand for apple cores, they can do whatever they want. If they decided to use gold all those same arguments would apply to gold. And yes new discoveries can create inflation, but I doubt any discovery could increase the supply of money to the same degree as typing a few zeros on a keyboard. There is a cost associated with mining gold. Many economists see this as wasted resources, I see it as a dis-incentive to create inflation. I'm not afraid of declining prices, economists have been teaching for years that declining prices give people an excuse not to shop, yet everyone I know has more than 1 cell phone, computer, and television. It's almost the exact opposite, when people see the lower prices they get excited and run out to get another widget. Gold is not perfect, but it takes the power away from central bankers and governments, which alone is a significant advantage. The fact it has less industrial use is a positive for me, why would we want to create conditions where savers deprive industry of something it needs? Savings should be encouraged.

It's unfortunate the inflation tax, has to punish those who are risk-averse. I agree with having some form of gold backing to keep a check on governments and the expansion of the money supply.

Think of it this way: Canadian Tire money would suddenly become worthless if Canadian Tires went out of business. Their goods in stores in essence are a "gold" back of their currency.

this might be a little off topic, but spurred by some of the commenters over at Economist's View, I've been thinking about social credit lately (an old Canadian party with a very unorthodox economic policy that went extinct some time in the 70s).

In the current situation the government creates money, sets interest rates, but then depends on private lenders to distribute the loans. Unfortunately, those private lenders are all so compromised that they are not distributing the money, but rather hoarding it for themselves. It seems that in a lot of ways the current bank oriented system is dangerously pro-cyclical. Perhaps, because once the distribution of money is handed over to players (banks) that are supposed to act exclusively out of self-interest, this hampers any collective action through monetary policy. Once you throw skewed incentives like short-term bonuses based on money lent during the good times, the picture gets really messy. It appears very pro-cyclical to me, working at cross-purposes to monetary policy,

While Bernanke has claimed to be willing to 'dump money from helicopters' onto the problem, the money seems to just get dumped on the banks, and stays there, so there have been a lot of calls to allow the Fed to provide financing directly to various non-bank entities. My question would be, should we do away with the bank monopoly on credit distribution/money creation? Should the treasury/fed set up some sort of system for direct lending, say for example refinancing mortgages at interest rates close to those on treasuries? To some extent this is what the GSEs already did (although they worked through secondary markets still, rather than directly). Would this be too open to political corruption?

Or conversely, could the government get out of the lending and interest rate business altogether, instead originating money by simply printing it and using it to pay government expenditures, and allowing private companies to accumulate and lend out money at a market interest rate if they wish, but not actually providing government credit via a central bank? This would separate money creation from money lending, making all monetary policy fiscal in a sense. The government could still target employment and inflation by adjusting expenditures and tax rates (via a rebate system etc.), but would stand aside from the credit markets. Randy Waldmann discussed some similar ideas recently, and it has got me thinking. Seems like an interesting idea to me. Are there any glaring problems that I'm missing?

Nick, thanks for that summary. I have a lot of follow-up questions that come to mind but I'll try and be brief.

The biggest one is how you ensure that the state, with its monopoly, does not simply start printing money (not necessarily to the point that it's worthless, but certainly to the point that it loses a significant amount of value - double-digit inflation). A state-run milk monopoly is limited by the number of cows. You can't just conjure up 10 million liters of milk out of thin air. You can conjure up 10 billion dollars (or 10 trillion), if there's no real backing for the currency.

I also wonder how you determine that 2% inflation (or any level) is the "right" level. Indeed, why is any amount of inflation desirable?

I'd also point out that the government is not good at sharing space in the market. When it enters, it tends to prohibit competition. I'm thinking especially of regulatory approvals, e.g. requiring Health Canada approval for the sale of drugs. You can't sell your medicine without that sign-off, even if you put up a big neon sign with a label on the product saying "Not approved by the government." It's their way or the highway.

Patrick, on the question of state involvement in the economy creating incentives for people to educate themselves and vote, I highly recommend Bryan Caplan's book, "The Myth of the Rational Voter." He makes a very strong argument that democracy pushes people to do anything BUT be informed and make good decisions.

P.S. Nick, extra credit for typing all that up before 7am!

"it takes the power away from central bankers and governments"

pointbite: I don't see this as a positive. In Canada, governments are elected by the people, so there is nothing to fear there. As I said, I have no problem with a legitimate democratic government creating a central bank to set monetary policy. Are there problems of transparency and abuse of power? Sure. My view is that those problems are best dealt with by the an informed citizenry participating in their democracy.

I couldn't quickly find M0 stats for Canada or the US (I did find M1,M2,M3 but not M0), but I don't think it is accurate to say that central banks in advanced economies just print huge amounts of money. Gov'ts do issue huge amounts of debt, but issuing debt is not at all the same thing as printing currency. I won't argue that the huge increases in the amount of debt/credit (both gov and private) aren't a big problem, but I don't think that it is a problem caused by fiat currency. After all, the credit bonanza that some say led to the depression happened under the gold standard.

I also don't buy the argument that the gold standard precludes government interference with the currency. For example, in the early years of the depression the US gov't tinkered with the official price of gold to try to combat deflation. I don't doubt this could happen again.

Adam: granted; people are not rational. What system would you suggest as an alternative to democracy?

Patrick, my suggestion is roughly the same as Caplan's: place strict constitutional limitations on the state's ability to participate in the economy. The U.S. constitution (as adopted in 1787, not as currently interpreted into meaninglessness) is as good a model as any.

Patrick, my answer is roughly the same as Caplan's: place strict limitations on the state's ability to participate in the economy. The U.S. constitution (as originally adopted in 1787, not in its present form, having been interpreted into meaninglessness) is as good a place as any to start.

In a nutshell, Caplan's argument is that that people are much more rational as consumers than they are as voters, because they bear the full cost of irrationality in the first case but none of it in the second case. Reading his book, I just kept thinking to myself that this is exactly what I've been observing among my friends and acquiantances for years.

"Caplan's argument is that that people are much more rational as consumers than they are as voters, because they bear the full cost of irrationality in the first case but none of it in the second case"

I disagree with that assertion. Counterexamples: an irresponsible consumer who goes bankrupt 'damages' his creditors, not just himself, and if We elect a gov't that wrecks the economy, we all suffer.

"... the U.S. constitution (as adopted in 1787, not as currently interpreted into meaninglessness)"

Societies evolve. Regressing to 1787 - a time of slavery, women as non-people, enormous income inequality, etc ... is not something I view as a good idea.

"I disagree with that assertion. Counterexamples: an irresponsible consumer who goes bankrupt 'damages' his creditors, not just himself, and if We elect a gov't that wrecks the economy, we all suffer."

As I said, it's his argument in a nutshell - of course a consumer who's irresponsible damanges his creditors by going bankrupt. Just as if someone decide to stop looking both ways before crossing the street, his friends and family will suffer when he gets hit by a car. But in both cases it's the individual who suffers the lion's share of the impact (no pun intended).

As for electing a government that wrecks the economy, yes but the point is that *your* individual vote has zero impact on the winner - unless the margin was one vote. Even if the margin is 100 votes out of 10 million (like Florida in 2000), that's still more than your single vote. Yes, if "we" get it wrong then there's a problem. But that's no incentive for you, as an individual, to get it right. If you engage in reckless economic behaviour, you're going to screw up your life. If you engage in reckless voting behaviour, it makes no difference whatsoever to your life - the outcome depends on what everyone else does, not what you do.

"Societies evolve. Regressing to 1787 - a time of slavery, women as non-people, enormous income inequality, etc ... is not something I view as a good idea. "

With respect, that's a non-sequitur. Saying that we shouldn't adopt limited government because in 1787 people were more racist and sexist than they are today doesn't address the arguemnt. My claim is that a government of strictly enumerated powers and based on a presumption of liberty is preferable to the Leviathan we have today. The fact that 200 years ago slavery existed in the Western world is neither here nor there. It's like saying because Hitler was a a vegetarian and a non-smoker, vegetarianism and non-smoking are to be avoided. We can have limited government without bringing back slavery and reducing women to the status of chattel. And frankly, abolishing slavery was a seminal act of *reducing* government power.

Good comments discussion. I'm going to just answer Adam's 11.19.

Glad you found it helpful.

"The biggest one is how you ensure that the state, with its monopoly, does not simply start printing money". Dunno. Some states do (Zimbabwe); some states don't (Canada recently). That's recognised as one of the biggest problems. But would the Gold Standard be any help? No, because an irresponsible government would just stop converting paper money into gold anyway. Even with a pure Gold currency system, they can still just clip or debase the coins. The only real advantage is that a Gold standard creates a "trip-wire" so we can easily see when the state starts to break the rules. Advocates of private monies say that competition between private money producers would keep inflation low. Critics say private profit-maximising firms would print massive amounts, take the short-term profits, and run.

Government doesn't like competition: true. There are two types of competition for money in Canada: foreign money (USD mostly); and various private monies produced by mostly "lefty-hippy" types. Neither seems to really catch on. Both are legal, as far as I know (unless you try to use them to dodge taxes). Partly "network effects" may explain why the Looney keeps its central position, and most people choose it.

Why 2% inflation, and not zero? Opinions differ. Some say 0% is better. I say that 0% inflation, rather than the Bank of Canada's 2% target, would mean that the Bank would now be trying to set interest rates at minus 1%, rather than plus 1%. That little bit of inflation reduces the chances of ending up trying to get interest rates below 0%. (Because interest rates adjust for average expected inflation).

Adam: I think we getting OT here. Our differences seem rooted in political philosophies. I have no problem with the messy nature of democracy and the fact that I don't always get what I want or agree with government policy. I also have no problem with reasonable government involvement in the economy as tend to agree with the views of people like Joseph Stiglitz and Paul Krugman.

I think we'll have to agree to disagree.

First of all, base money has hit the moon and back. But it's not even that important anymore, I would argue that some forms of credit are the new base money, and consumer credit is not expanding.


Regarding democracy, we don't vote for Governor of the Bank of Canada, and regardless elected governments occasionally fall for populist themes that yield short term benefit (inflation is always fun in the short term) and long term pain (because in the long term, we're all dead, right?). Of course the gold standard doesn't prevent cheating, but it gives the people SOME ability to protect themselves and call the government to account. The alternative is NO ability to protect yourself. So the move from 0 to something greater than 0 is in the right direction.

I just want to add, you do realize how close we were to having Jack Layton as Minister of Finance? Just a thought to consider.

wow - I may have to write a post about gold to get my traffic up. Its like a loss leader - come for the hysterical discussion of long refuted exchange rate regimes, stay for the delicious forecast models.

Brendon: try to write a post on Gold, protectionism, Austrian economics, global warming, evolution, hockey fights, and maybe sex. That should do it!

Patrick, yes, we're definitely OT for the post but I think it's perfectly fair game for the blog in general (if we got into Middle East politics, we'd obviously be out in left field).

We can always pick this back up on another post where this discussion would be more germane, but I will just say that I don't think that economic activity is legitimately subordinate to majority voting. Any more than civil rights, torture, slavery, freedom of speech, freedom of association, etc. In my mind, it doesn't matter if someone is in a minority of one - as long as (s)he isn't physically harming anyone or damaging their property, it's no one's business. That leaves a lot of grey around the margins but it's a fairly straightforward brightline rule for most human interaction.

Nick/Brendon: throw in a couple of mentions of Israel and Palestine (or, even better, put either "Israel" or "Palestine" in scare quotes). You'll wish you'd never heard of blogs.

Nick : "I don't think that economic activity is legitimately subordinate to majority voting"

I don't think that I agree in general. Tyranny of the majority is certainly an issue ... But, I do believe that there are time when it is legitimate for the government to limit or intervene in economic activity on grounds other than causing physical harm to other or property damage.

Brendon, sorry for ignoring the joke, but gold wasn't actually "refuted" as much as abandoned for convenience sake.

Patrick, that was my comment (Adam's) about majority voting.

Yep, in TypePad, names appear below the comment.

Adam, Nick: Sorry. My mistake.

Gold standard would increase the price (in relation to rest of global economy) of gold probably 4x. That is, the value of all gold that has been mined would go from about $4T to $16T.
Gold annual production would go from maybe $60B now to $300B(?). This is $240B/year less governments would have to spend on paying bonds to rich people and building hospitals and stuff.
Gold Standard works best when there is no internet or economics discussion. It a step towards barter economy and is like buying WWIII house insurance. The gold penalties are $240B/yr and $12T ammortized ($60B/yr) or $300B/yr in annual needless gold industry capitalization. You could get the same brake by increasing bank reserve ratios without the gold mine bubble. There is a continuum of positions in between pork-inflation and gold standard.

We have inflation because ever since steam engines were used us rotary mechanical power, we've been on an upward trend in the amount of goods/services created versus polluted/bombed. I'll call it the R&D rate of 2.5%/yr but no one knows. It is about what inflation is targetted now. Just to maintain existing prices you need this inflation. If you don't inflate, you get deflation by default as new technologies and minerals and info gets costed faster than used up goods get written off. During deflation, people take their money out of banks (store under mattress to preserve value) and our existing capitalist system goes to WWII rationing and Soviet industrial planning. Deflationary monetary policy causes panic, I just figured out it is the panic that makes my previously forwarded negative interest rates silly.
Goldbugs need to be willing to inflate their gold as fast as civilization advances or provide a method to keep investment up when savings get liquidated in our fractional reserve system (maybe large savings/checking account holders can be enticed to take up current bank lending areas of activity somehow).

When I hear people describe deflation in WW2 terms it sounds as crazy to my ears as I'm sure the gold standard sounds to yours. We have had price deflation in technology for decades, yet we all own computers, cellphones and televisions. Please explain why Intel and RIM still exist if lower prices cause would be customers to stuff their money under the mattress.

Price deflation in a sector due to productivity gains or technological advancement is not the same as deflation due to aggregate demand being crushed in a vicious circle of rising debt relative to cliff diving asset prizes.

Apart from the fact that deflation seems to be associated with financial crises that clobber appetite for risk, across the board deflation creates a disincentive to take risk. After all, if you stuff your money in the mattress today, it'll be worth more tomorrow, so why risk it? If nobody is willing to take risk, investment dries-up and you get 1933.

No, deflation is a bad thing.

Since you avoided the question can I assume you concede falling prices does not impede the ability of businesses to sell their goods? Good, let's remove that nonsenses from our textbooks and leave it behind, finally.

To respond to your point, the scenario was not cliff diving aggregate demand caused by bursting credit bubbles, because none of that should ever occur if the system has no central bank and respects a gold standard. The supply of gold available for circulation almost never drops. It may not rise as quickly as economic growth, which isn't ideal, but it's far superior to the alternative. Psychology changes and people can decide to hoard, but that can happen under any monetary system and I'm still waiting for evidence from Japan or the Fed that our infamous helicopters are going to help. A minor disincentive to take risk is a small price to pay for less severe economic shocks, and arguably exactly what we need today, quite frankly. We haven't even seen particularly terrible inflation in recent years but nevertheless people take wild risks to earn real gains, look at the mess it created -- so the argument can't be "deflation is bad therefore inflation is good" you still need to defend poorly managed inflation. Not perfect world inflation, but real world inflation managed by fallible people and fallible models.

pointbite: "Since you avoided the question can I assume you concede falling prices does not impede the ability of businesses to sell their goods? "

No need to get pissy. I think I did address your question, but I'll do so again more explicitly.

RIM and Intel have continued to be profitable because falling prices for their products were caused by technological innovation; their costs went down thus allowing them to drop their prices while maintaining their margins. Importantly, falling prices in this context was not associated with demand for their products. This is not the case in a generalized deflationary spiral where aggregate demand falls precipitously.

"Good, let's remove that nonsenses from our textbooks and leave it behind, finally."

Well, I'm not going there. On the contrary, I'd be happy to have a better understanding of the textbook and I'm grateful to people like Nick for sharing their knowledge.

I think we'll have to agree to disagree.

Why does everyone assume I'm yelling? I'm not.

Of course reduced demand can cause reduced prices, I'm arguing the opposite, that reduced prices do not cause reduced demand. The fact prices may fall under a gold standard is not a bad thing. You keep going back to this deflationary spiral, which misses the point entirely. Furthermore, there would be no spiral if there was no bubble. The occasional mania is inescapable, but they will tend to me much less extreme with more discipline in the financial sector. One way (not the only way) achieve that is with gold.

Once again, why place the future of your economy to a metal, that is mined? Why let an accidental gold disovery in another nation determine your position in the world be determined by a randow discovery of massive amounts of gold in Coubtry XYZ(now suddenly the richest country in the world)? I know only X amount has ever been mined, inflation tax, government controls money supply controls my life arguments. But why let another country control your supply of money? Sounds like a reason why ancient wars were started, to plunder for economic gain ie another contry/empires gold, and other resources. I prfer knowing that inflation will be 2-3%, while speculating in other currencies to hedge that.

And yes, deflation does defer investing. If idle resources returned 3% a year, under my mattress, in my floorboards, in a hole in my backyard, why would I ever invest? The risk premium would be enormous, because the risk free approach, do nothing, is so rewarding.....
Also, private monies do compete. Companies routinely extend credit to clients, always have and always will.

Nick Rowe,
your argument makes perfect sense. Except I have not seen evidence that currency prices adjust rationally. The failure of exchange rate adjustment to prevent large and persistant US trade deficits is one primary source of this mess.

As a reply to Caplan, it is precisely BECAUSE an individual vote does not swing the outcome that people should use in responsibly for the public good. It should be seen (as in Australia) as a responsibility not just a right.
As for this:

One way (not the only way) achieve that is with gold.

Yes exactly, for instance a responsible and appropriately targeted central bank.

And the answer to "what is to stop..."
Is OBVIOUSLY democratic accountability!

Why do you people hate democracy so much? What is your alternative, exactly?

Reason: "Nick Rowe,
your argument makes perfect sense. Except I have not seen evidence that currency prices adjust rationally. The failure of exchange rate adjustment to prevent large and persistant US trade deficits is one primary source of this mess."

I'm not sure whether exchange rates adjust rationally. But I would not take the existence of persistent trade deficits (or surpluses) as evidence against rationality.

There are many reasons (demographics, investment opportunities, etc.) why it would be rational for one country to have spending greater than income (national investment greater than national savings) for many years, or decades. And that would result in a persistent balance of trade deficit, lasting many years or decades.

but that undermines the rest of your argument.

reason: I don't think so. When interest rates are stuck at zero the exchange rate get's determined in a very different manner than in normal times.

Normal times: Increased government, investment, or consumption spending increases demand for Canadian goods. Bank of Canada raises interest rates to keep inflation on target, exchange rate appreciates in response to higher interest rate, output stays the same, net exports decline.

Now: Increased government, investment, or consumption spending increases demand for Canadian goods. Bank of Canada does nothing. Exchange rate depreciates due to higher imports. Net exports stays the same. Output rises.

Nick Rowe
I don't think the exchange rate is so mechanically determined, after all it is a relative price and the alternatives are affected by the same sort of forces. I would love for your story to be true, but I don't think empirically it actually is. Can you prove it?

Central bank bad gold standard good its black and white for me I don't see how anyone who isn't some rich international banker making a killing off the central banking system would support it. One more thing the central bank isn't owned by the government its not even regulated by the government it is completely independent.


Maybe you want to change how you express yourself.

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