Au Shucks
Picking a fight with my economic betters again, I commented on Everyday Economist blog (backstory here). The EE sent me a couple of thoughtful emails.
I'm willing to concede on all his economic points, but I'm not abandoning my defense of David Frum's main point: it is a mistake (Frum calls it "crank monetary policy") for Rep. Ron Paul to expound on the gold standard. Considering all of the abuses to our freedom that our government practices, it seems to me that he is dwelling on a fringe issue. Even if I agreed with the good Doctor, I wouldn't advise a candidate to highlight it as Rep. Paul has.
Feel free to disagree. Last night, however, I thought of a philosophical objection to the Gold Standard. Since I have a blog login, I thought I would share my own "crank monetary policy" with you good people.
Why Gold Is Inferior to Paper Money
Money is virtual. Wealth is created, ex nihilo and it makes no sense to have currency tied to a limited, real asset. Just as man learned to count higher than ten by using numbers instead of fingers, we must grow into a post-metallist economy that allows wealth to exceed the planet's physical assets. We make microchips out of sand and software out of thought; we should not be limited to Earth's resources.
By being limited, gold backed wealth is zero-sum. Imagine if Bill Gates wants to have all his wealth in money, so he can roll around in it a la Scrooge McDuck. Hey, it's his money. Without reserve banking, will there be enough money for him? What if he wants to double it? If the world's money is all tied to Gold, every dollar that Mr. Gates earns is a dollar somebody else does not have. That is not the way wealth works.
"Aha, jk, you are conflating wealth and money," you say. "You bastard," you might add. I'll ignore the name calling, but address the point. Wealth and money are separate precisely because we have separated them. I know it is extreme to call this wealth limiting, but it strikes me as a step away from the creation of virtually-denominated wealth that I celebrate.
Economics and Markets
Posted by jk at November 14, 2007 10:55 AM
Well, I hope you don't take offense, but you do proceed from liberals' old fallacy about "zero-sum." Real money is never zero-sum, because if Bill Gates earns a dollar, or if he saves a dollar of wealth, I can always earn the dollar from him. The amount of money in an economy isn't as important as its *velocity* (the rate at which it is exchanged).
If Scrooge McDuck merely wants to roll around in his money, very well, but it's not doing him any good. It's not earning interest in savings accounts, or earning dividends from being invested in securities, or earning profits from being invested in businesses and commodities. As I've pointed out since the second post of my blog ("Eating the rich? Or just soaking them?"), rich people don't hold on to their money: they spend it or save it, and either will allow the money to circulate back into the economy. And even if someone has 99% of the world's money and spends only 1%, the rest of us will meanwhile establish prices based on a medium of exchange we want -- with the exception of when government prevents us.
One of many problems with our current central banking system is that it effectively limits us to what *it* decides is money, not what we freely decide to use. It doesn't do so by the use of statute, because you can always transact with anyone based on bushels of wheat, shiny pebbles, or any medium of exchange you agree on. In Zimbabwe, it's illegal and severely punishable to use any foreign currency. The U.S. government doesn't punish, but it still effectively coerces us into using dollars by making it sufficiently more expensive to use anything else, by brainwashing the public into accepting dollars rather than thinking about the lack of value.
And yes, you do confuse money with wealth. Money is merely a tool, a medium of exchange. It is not necessarily virtual, and in fact most societies always based it on tangible things. After Marco Polo introduced Chinese paper money to medieval Europe, goldsmiths soon invented fractional reserve banking.
You seem confused as to what fractional reserve banking is. It isn't necessary to ensure enough wealth for everyone. It's just the mechanism by which banks lend out money, whether it's gold-backed or merely paper. If the bank couldn't lend out the same money you have on deposit there, then it would have no way of paying you interest. It isn't inherently fraud, either. Most people realize that when they deposit money at a bank, some or all of it has been lent out. You're trusting the bank that if you want some or all of your money, you can get it on demand, because other bank customers won't be going for theirs at the same time.
You may think it makes no sense to limit money to a limited, real asset, but does it make sense to use fiat money, whose value is determined at the whim of others? Strictly speaking, even gold has no inherent value, only a subjective one based on individual perception. To a caveman, a gold nugget is more valuable as something to throw at a bird (paraphrasing a book on metals I read as a child). The reason gold is nearly universally popular is simply because nearly everyone likes it and considers it valuable enough to acquire. The Yap islanders might even be using large boulders today, not because rocks are inherently desirable, but because these are limited in supply and impossible to counterfeit. By contrast, microchips to a Rwandan refugee aren't terribly valuable, and a laptop to a poor Zimbabwe child (one without electricity) is more likely to become a doorstop. But introduce gold or silver, a shiny metal they can generally surmise is valuable...
So which do you prefer, a central bank that is increasing MZM at a frightening pace that *understates* inflation (as Ron Paul recently noted, 12%!), or a commodity-backed currency with occasional deflationary risks? MZM is about as good as we can get, ever since the Fed started to hide M5. Notwithstanding we can always dig for more gold, we can deal with natural deflation cycles. If we aren't hindered by central planners and the behemoth financial infrastructure they set up for us, people can let prices and interest rates adjust on their own.
I recently read or heard someone say that since 1914, we've had only occasional recessions, rather than the seemingly regular economic downturns of 19th century America. Well, those were only "panics" usually affecting the agricultural sector, the banking sector, etc., but not wrecking the entire population's prospects for employment. And as Don Luskin recently noted, the Fed's first gift was the Great Depression, courtesy of the Fed expanding credit through the 1920s and then cutting the money supply by a third. Sound familiar? Greenspan didn't cut things by a third, but by enough. That's what happens when you have central planners, either incompetent or malicious, controlling the value of your money.
In fact, we didn't need a central bank to control the value of our money. William Jennings Bryan made his famous "cross of gold" phrase in a speech supporting the free coinage of silver. Farmers wanted that so they could more easily pay off their debts. It wasn't so much coining more silver, but saying that a silver coin would be worth twice as much gold as before -- inflating the currency, which is a boon to borrowers and spendthrifts, and harmful to savers.
As Don Luskin also recently said, it's one thing to have a lender of last resort, but quite another to have a small group of people with the power to set prices and interest rates arbitrarily.
Well, I hope you don't take offense, but you do proceed from liberals' old fallacy about "zero-sum." Real money is never zero-sum, because if Bill Gates earns a dollar, or if he saves a dollar of wealth, I can always earn the dollar from him. The amount of money in an economy isn't as important as its *velocity* (the rate at which it is exchanged).
If Scrooge McDuck merely wants to roll around in his money, very well, but it's not doing him any good. It's not earning interest in savings accounts, or earning dividends from being invested in securities, or earning profits from being invested in businesses and commodities. As I've pointed out since the second post of my blog ("Eating the rich? Or just soaking them?"), rich people don't hold on to their money: they spend it or save it, and either will allow the money to circulate back into the economy. And even if someone has 99% of the world's money and spends only 1%, the rest of us will meanwhile establish prices based on a medium of exchange we want -- with the exception of when government prevents us.
One of many problems with our current central banking system is that it effectively limits us to what *it* decides is money, not what we freely decide to use. It doesn't do so by the use of statute, because you can always transact with anyone based on bushels of wheat, shiny pebbles, or any medium of exchange you agree on. In Zimbabwe, it's illegal and severely punishable to use any foreign currency. The U.S. government doesn't punish, but it still effectively coerces us into using dollars by making it sufficiently more expensive to use anything else, by brainwashing the public into accepting dollars rather than thinking about the lack of value.
And yes, you do confuse money with wealth. Money is merely a tool, a medium of exchange. It is not necessarily virtual, and in fact most societies always based it on tangible things. After Marco Polo introduced Chinese paper money to medieval Europe, goldsmiths soon invented fractional reserve banking.
You seem confused as to what fractional reserve banking is. It isn't necessary to ensure enough wealth for everyone. It's just the mechanism by which banks lend out money, whether it's gold-backed or merely paper. If the bank couldn't lend out the same money you have on deposit there, then it would have no way of paying you interest. It isn't inherently fraud, either. Most people realize that when they deposit money at a bank, some or all of it has been lent out. You're trusting the bank that if you want some or all of your money, you can get it on demand, because other bank customers won't be going for theirs at the same time.
You may think it makes no sense to limit money to a limited, real asset, but does it make sense to use fiat money, whose value is determined at the whim of others? Strictly speaking, even gold has no inherent value, only a subjective one based on individual perception. To a caveman, a gold nugget is more valuable as something to throw at a bird (paraphrasing a book on metals I read as a child). The reason gold is nearly universally popular is simply because nearly everyone likes it and considers it valuable enough to acquire. The Yap islanders might even be using large boulders today, not because rocks are inherently desirable, but because these are limited in supply and impossible to counterfeit. By contrast, microchips to a Rwandan refugee aren't terribly valuable, and a laptop to a poor Zimbabwe child (one without electricity) is more likely to become a doorstop. But introduce gold or silver, a shiny metal they can generally surmise is valuable...
So which do you prefer, a central bank that is increasing MZM at a frightening pace that *understates* inflation (as Ron Paul recently noted, 12%!), or a commodity-backed currency with occasional deflationary risks? MZM is about as good as we can get, ever since the Fed started to hide M5. Notwithstanding we can always dig for more gold, we can deal with natural deflation cycles. If we aren't hindered by central planners and the behemoth financial infrastructure they set up for us, people can let prices and interest rates adjust on their own.
I recently read or heard someone say that since 1914, we've had only occasional recessions, rather than the seemingly regular economic downturns of 19th century America. Well, those were only "panics" usually affecting the agricultural sector, the banking sector, etc., but not wrecking the entire population's prospects for employment. And as Don Luskin recently noted, the Fed's first gift was the Great Depression, courtesy of the Fed expanding credit through the 1920s and then cutting the money supply by a third. Sound familiar? Greenspan didn't cut things by a third, but by enough. That's what happens when you have central planners, either incompetent or malicious, controlling the value of your money.
In fact, we didn't need a central bank to control the value of our money. William Jennings Bryan made his famous "cross of gold" phrase in a speech supporting the free coinage of silver. Farmers wanted that so they could more easily pay off their debts. It wasn't so much coining more silver, but saying that a silver coin would be worth twice as much gold as before -- inflating the currency, which is a boon to borrowers and spendthrifts, and harmful to savers.
As Don Luskin also recently said, it's one thing to have a lender of last resort, but quite another to have a small group of people with the power to set prices and interest rates arbitrarily.
Posted by: Perry Eidelbus at November 14, 2007 3:16 PMYou're thorough, Perry, I respect that. But I don't think I said much of what I am accused of saying.
Starting with Zero sum, I say quite the opposite. It is my zealous belief in infinite, non-zero-sum wealth that inspired my post. To celebrate the concept of infinite wealth, I want to free if from the shackles of Gold -- and rocks.
I did not have a bad word for reserve banking, I was celebrating it and expressing concern that a true gold peg might threaten it.
Did I say I wanted to "ensure wealth for everyone?" Can you find a post on this blog where I bad mouth "the rich?" I think not.
Legitimately, you ask "You may think it makes no sense to limit money to a limited, real asset, but does it make sense to use fiat money, whose value is determined at the whim of others?" And I'll concede concern for capriciousness. Sign me up for a Milton Friedman "Fed Computer Program" or even a Bernankeesque Inflation Target.
Am I attacking a strawman? Guilty as charged. The Gold Standard will not kill fractional reserve banking. It was meant as a philosophical post. I am suggesting that the gold peg implies limits and zero sum.
You, and Mister Luskin, and Rep. Paul are WAAAAAAY overstating inflation. If I believed you that we're in double digit inflation, I'd sign up. I'm still in the Kudlow school that productivity gains, technology, and global trade are deflationary, and offset additional demand for commodities.
I think the CPI overstates by more than a percent, and that our present, sub-one-percent real inflation may harm the Scrooge McDucks of the world, but represents no hurdle to realizing real gains from any typical saver or investor.
Also, be careful about bashing the greatest capitalist of our time.
Posted by: jk at November 14, 2007 5:28 PMYou're claiming that gold-backed currency, let alone specie, is zero-sum. It isn't. Again, it's all about velocity. Think of it this way. There's only so much road out there at any given time. So how do all of us use a finite resource? By sharing it. As I pass over a stretch of road, even though it's only one lane, I have no monopoly on it. It's of no use to me if I hog it. So when the driver in front of me moves forward, it's not because he's altruistically letting me advance also, but because it's pointless for him to stay there. Likewise, it's of no use for me to hoard money for myself under a mattress.
You still don't seem to understand the inherent danger of your desire for "infinite wealth" via money. If there's an infinitely inflatable supply of money, evil and stupid men will inevitably destroy the real value of our money. Their actions will penalize people who are trying to save, and benefit governments whose nature it is to take and spend.
In theory, if you have men of good character and intentions, they can come close enough with central banking. In theory. However, reality has shown otherwise. Milton Friedman, for all the respect he rightfully earned, would have never survived the politics of central banking. Look at Bernanke, who was renowned as a hard-numbers guy when it came to targetting inflation. He showed his true colors when he cut rates, bowing to the political pressures of both parties. Behind the scenes, too, he hasn't done anything to stem the growth of the money supply itself. *That* is the real problem, not interest rates.
Also, wealth should never be infinite. If something is infinite, it has no value. A particular security, whose ownership is a form of wealth, has value only because there isn't a lot of it.
Fractional reserve banking works just the same with gold or gold-backed currency as it does with pure fiat money. It's only a matter of someone making a deposit, and the bank being able to lend it out.
"Did I say I wanted to "ensure wealth for everyone?" Can you find a post on this blog where I bad mouth "the rich?" I think not." Perhaps it was clumsy phrasing, but I never said you were badmouthing the rich. I know you well enough. What I was saying there is because you said fractional reserve banking is necessary so Bill's dollars don't become dollars other people can't have. Again, you're confusing money and wealth, and not understanding how fractional reserve banking really works.
I saw something you wrote that I'd missed before: what if Bill wanted to tie up all his wealth in money? Nobody sane tries to do that, but even if he did, it would properly drive up the price of money and decrease the value of other assets. It's merely another instance of consumer preference. However, it's rather impossible, logistically: there's only $8 trillion of MZM out there for a $13+ trillion economy.
I still have never gotten around to reading "The Case Against the Fed" by Murray Rothbard, even though a friend gave me a copy. But he largely makes the same points I am.
Kudlow is a good guy, and I respect him, but he can be completely off at times. Cutting taxes and garnering increased revenues is one thing, but when he goes off on supply-sider nonsense about "injecting liquidity," he ignores that the resulting growth comes at the cost of higher inflation. Mises.org often calls him on that.
Luskin isn't even an Austrian like me, yet he knows, as does Josh Hendrickson (Everyday Economist). Inflation is showing up in the price of gold, oil, copper and other commodities, whose prices are rising much faster than demand can explain. We're not seeing it for two reasons. One, as I've pointed out since 2003, trade with China and other low-cost manufacturers is helping to offset inflation as we replace our higher-priced goods with lower-priced imports. Second, the Fed and BEA are very clever in their use of "inflation baskets." The very idea of calculating a "basket" average for a population of 300 million is statistically and logically absurd.
There's only one measure of inflation, and that's the growth in the money supply. Inflation, after all, is a purely monetary phenomenon.
Now think on this: if productivity (which includes technology advancement) offsets inflation, how much better off would we be if we had the same productivity gains *without* a central bank to devalue our wealth? I'll also add that it's a myth that we need inflation for growth. Economies can grow just fine without central planners/bankers. Even 1% per annum inflation is harmful to Scrooge, who will save $1, get an x% return after one year, but will find his total purchasing power one year later is only $1+(x-i). The only beneficiary is the pure spender, chief of which is government.
Oh, and trade doesn't lead to deflation of commodities. Until new and/or superior sources are found, the price of commodities will actually increase in the immediate future. This is because poorer countries will start getting wealthier through trade, and not only will they demand greater quantities of commodities, they'll be able to pay the higher prices. (Price is set not only by a willingness to pay, but an ability to pay.)
BTW, I never bashed Scrooge McDuck. I just point out that his gold room is ridiculous, and I also would put Ebenezer Scrooge (before his transformation) higher as the greatest capitalist of all time.
Posted by: Perry Eidelbus at November 15, 2007 1:00 PMYou're absolutely right about Ebenezer. And your point about infinite wealth is well taken. I want to spotlight the lack of limits on wealth. Let me leave economics and borrow from physics: wealth is finite but unbounded.
As silly as an inflation basket is, I reject the idea that you can turn to MZM -- or Gold -- and capture a true measure of money, prices, or inflation. You cannot capture the gains from productivity and trade. Inflation is indeed a monetary phenomenon, but you cannot accurately measure money.
Trade is deflationary because of efficiencies, just like productivity. Increased demand may raise the prices of commodities, but comparative advantage will lower the cost of manufactured goods and relocatable services. That sounds pretty familiar to me. Gold is up, laptops are down. You newly affianced guys (congrats, by the way) have to buy Gold, but I can get my wife a new iPod or laptop for our 25th Anniversary next year, and she'll be happy.
I don't think you "need" inflation for prosperity, but I do think you need to avoid deflationary shocks. You see what could have been as the gains we made without inflation, I would question whether there would have been enough liquidity to make the productivity gains we made. Keep in mind I'm a bubble lover. It's not liquidity I love, it's excess liquidity.
Posted by: jk at November 15, 2007 5:34 PMOkay, there are several things that need to be discussed here:
1.) The gold standard is not zero sum.
Suppose, for example, that every country used the same fiat currency (for simplicity, the US dollar). At any given time there are a fixed amount of dollars. According to jk, when central banks print more money this leads to greater wealth. While individuals certainly may have money, each dollar is worth less. If the money supply doubles, prices double.
2.) Wealth is not to be confused with money.
Prosperity comes as a result of economic growth and innovation, not by printing more money.
3.) Contrary to the Kudlow-school, innovation, economies of scale, and specialization are not deflationary in the long-run.
In the long-run, inflation = money growth. As long as the money stock is growing, the overall price level is rising regardless of whether computers and iPods are getting cheaper.
4.) There are accurate measures of money.
Recall, for example, the quantity theory of money:
MV = PY
Money*Velocity = Nominal GDP growth
(this is why Perry is correct to bring up velocity in regards to the gold standard)
this can also be written as the sum of the growth rates:
Money growth + velocity growth = inflation + real GDP growth
Since velocity is relatively constant, one easy way to get an accurate level of inflation is to compute the following:
M2 growth - real GDP growth = inflation
Posted by: Everyday Economist at November 15, 2007 8:00 PMOn Kudlow & Co. the other night several guests were arguing about your first equation. It was pretty funny. I should defer to you on all matters of technical economics. I appreciate your additional training and knowledge and don't mean to downplay it.
However...
I still have to hang with my buddies, Larry K and Art Laffer, on the effective deflation created by the Wal*Mart effect, technology, and productivity gains. I can buy better things for less -- which is tautologically deflationary. It offsets the rising commodity prices that the same global growth causes.
None of those offsets shows up in your equations. Therefore, even though I recognize inflation as a monetary phenomenon (I am a Friedmanite at heart), I reject the ability of your equations to accurately measure the "buying power" of money.
The zero sum gold argument is about perception and not economics. I prefer the idea of virtual currency because it correlates to my idea of virtual, unbounded wealth. Sorry if you and Perry don't like it. I cannot prove its superiority on a chart, and I recognize its susceptibility to political manipulation ("fiat money" as Perry says).
Yet at heart, I believe in birthright liberty and ex nihilo wealth creation. The former reinforces my dedication to self-directed government, with all its attendant problems. The latter reinforces my objections to metallism, with all its attended benefits.
Posted by: jk at November 17, 2007 10:57 AMInflation is always and everywhere a monetary phenomenon.
If I can buy something better for less, the is a productivity gain and increases my prosperity (I just wrote about this here), but it does not create deflationary pressure.
Inflation, by definition, is the rise in the overall price level. Just because computers and iPods are getting better and cheaper does not mean that these phenomena are deflationary. The price level is still rising in spite of these gains (whether measured by any variation of the CPI, the PCE, or the GDP deflator).
Imagine you have the only Corvette in the entire world. This Corvette could be worth quite a bit. However, then suppose that a new Corvette is introduced into the market. How does this effect the value of your Corvette? (It goes down, for those in Rio Linda.) Money is the same. The more dollars that are in circulation, the less each dollar is worth. The less each dollar is worth, more dollars are required to purchase the same goods.
Innovation, specialization, trade liberalization, and technological advancement can lower some prices and increase our prosperity, but as long as the money supply is increasing, overall prices will still be rising.
Posted by: Everyday Economist at November 17, 2007 11:41 AMThis is great stuff and I'm learning much from you guys clearly more versed in economic theory than I am. From the sidelines it is apparent the arguments are not "pro-" one side or the other but "anti-" the other side. It's that old "representative democracy isn't the ideal form of government, it's just better than all the others" refrain.
While I fully appreciate all of JK's objections to a fixed money supply I'm more opposed to the US fiat Dollar in its present realization. Perry wrote, "If productivity (which includes technology advancement) offsets inflation, how much better off would we be if we had the same productivity gains *without* a central bank to devalue our wealth? [This is complementary to the point I often make about our potential prosperity in the absence of punitive taxation.] I'll also add that it's a myth that we need inflation for growth. Economies can grow just fine without central planners/bankers. Even 1% per annum inflation is harmful to Scrooge (...) The only beneficiary is the pure spender, chief of which is government."
But there is another beneficiary of constant, carefully cultivated inflation: The central bankers, for whom inflation amounts to their ROI for the "service" of printing, distributing, and retiring all of those fiat Dollars.
When the government and the central bank both benefit from inflation, what do you suppose we'll have?
And this leaves us with Perry's lament: "In theory, if you have men of good character and intentions, they can come close enough with central banking. In theory. However, reality has shown otherwise."
Posted by: johngalt at November 18, 2007 12:29 PMI was busy for a few days, and I'm pleased EE could jump in. A few things, jk:
"Let me leave economics and borrow from physics: wealth is finite but unbounded."
This statement is self-contradictory, actually. That's one problem with modern physics/astronomy: most scientists want to talk about a finite universe, but then they say "finite but without bounds." But if it's finite, by definition it must not have limits.
Anyway, again you're confusing money with wealth. We create new wealth all the time. We don't need new an infinite amount of money in *any* form to create an inifinite amount of MP3 players, cars or houses. The money is only a vehicle.
"As silly as an inflation basket is, I reject the idea that you can turn to MZM -- or Gold -- and capture a true measure of money, prices, or inflation. You cannot capture the gains from productivity and trade. Inflation is indeed a monetary phenomenon, but you cannot accurately measure money."
Indeed we can. The Federal Reserve knows exactly how much more money it creates, and if it creates 10% more in a year, that's a true 10% inflation.
Now, how much will show in our daily lives? It all depends on how fast the information travels. If a central bank merely prints paper money, it will always take time for prices to reflect the increase in the money supply. Let's consider a scenario (a disastrous one) where the central bank wanted to create overnight inflation of 100% by doubling the money supply. If the Federal Reserve declared that it was exactly doubling MZM overnight, starting at midnight tonight, it could do so by electronically lending as much money as all the banks want (at negative interest rates if necessary) until MZM is doubled. The Fed can ship out as much paper money as necessary to meet demand, but since few people keep all their money in cash on their person, it's doubtful that banks and separate ATMs would run out of cash.
"Trade is deflationary because of efficiencies, just like productivity. Increased demand may raise the prices of commodities"
Well, as EE pointed out, the problem is that you confuse inflation/deflation with a change in prices. I should have been more precise, myself. In my own blog entry "How government invisibly confiscates wealth," I point out that this is the whole fallacy behind central banks' stated mission of "price stability": they ignore supply and demand, focusing entirely on maintaining the "basket" prices while obfuscating that they're the sole driving force behind real inflation.
Trade will lower prices, so then if lower prices are good, why doesn't a central bank cut the money supply in half? The sudden deflation would eventually cut prices in half for everyone, right?
"You newly affianced guys (congrats, by the way) have to buy Gold, but I can get my wife a new iPod or laptop for our 25th Anniversary next year, and she'll be happy."
I had been planning on it, but my fiancee didn't want me buying her an engagement ring. She's rather we save the money for a house. Really, just how lucky can a guy be?
"but I do think you need to avoid deflationary shocks."
Occasional deflationary shocks, as opposed to one long inflationary shock since 1914?
"You see what could have been as the gains we made without inflation, I would question whether there would have been enough liquidity to make the productivity gains we made. Keep in mind I'm a bubble lover. It's not liquidity I love, it's excess liquidity."
I love the guy and all, but this is where Kudlow gets off into supply-sider nonsense. Economies create their own liquidity.
My oldest friend brought up a scenario he discussed with a co-worker. Let's consider an economy of three people. If I can remember it right, A and B decide to trade between each other, keeping all the money between themselves. C then has no money to use in trade.
However, C still won't be left out. All he has to do is offer his own goods and/or services, and either or both A and B will begin to trade with him, and using what? That's right, the money they had decided to hoard but *can't*, not if they want to trade. This goes back to my frequent point that whatever "the rich" save, it flows back into the rest of the economy. Someone might ask, what is C to do if he's just purely buying? That's just the thing, he can't by definition. As Bastiat pointed out, man is simultaneously both consumer and producer. In our real lives, we trade with our people, earn money, then use that money to trade with our people. Similarly, if C is "only buying," he must first create something of value to trade for what he wants. Let's say that A catches fish, can build a house, but can't chop wood very well. B chops wood, can kill deer, but can't catch fish very well. So they trade so that B will eat the fish he likes, and A can use wood to build his house. C can offer to build the house, if that's his comparative advantage, in exchange for fish. Or he can take wood and build furniture for B, should that happen to be his comparative advantage. There are an infinite number of possible combinations, which is the wondrous variety of the free market. Barter is inefficient, certainly, but when left to themselves, people will create money and liquidity as needed. They don't need evil or incompetent central bankers to destroy the value of their savings.
Forgive me for putting it this way, but you have a strange concept of wealth. As I said before, wealth *shouldn't* be infinite, otherwise it's meaningless. Wealth and money also shouldn't be able to come from nothing, for the very same reason. Now, no matter what government decrees (especially with health care and other elements of the welfare state), it cannot create wealth by fiat. But it tries to, by creating more money.
Posted by: Perry Eidelbus at November 19, 2007 2:12 PM | What do you think? [9]