[pacopasa]

Would a fixed amount of money, not tied to anything (the amount of gold can increase) allow for a healthy economy? The money could split or reverse split (like a stock), depending upon it’s value, if there was a practical necessity. Are there negative consequences of this approach within an economy and in international trade?

[jmherbener]

The production of all goods in the market economy are regulated by profit and loss. This assures efficiency in the use of resources by making production decisions concerning all goods by entrepreneurs. Production of commodity money on the free market economy, for example, would become more profitable during periods of economic growth as demand for money increased. The extra production of money would moderate the rise in its purchasing power, i.e., the extent of price deflation.

If the money stock was fixed in amount, then economic growth could cause price deflation significant enough to make credit contracts infeasible. For example, if price deflation were 5 percent per year and the pure rate of interest were 3 percent then the “real” rate of interest would be a negative 2 percent. But no one will lend at a negative 2 percent interest rate since he could just hold onto his money and have it all in the future.

Contrary to such technical programs for money, when entrepreneurs make decisions about what to offer people as money and how much of it to produce, they can abandon commodities that result in either excessive price deflation or excessive price inflation and adopt more suitable commodities.

[pacopasa]

If there came a point that gold was fully mined and there was no more to be found would it cease to be a practical commodity as money?

[jmherbener]

If economic growth generated sufficient price deflation to make credit contracts problematic, then yes entrepreneurs would transition away from gold to silver or another commodity that didn’t face this problem.

[pacopasa]

In this fixed currency system, if price deflation was 5% per year during a period of growth, then people would have more money in hand, more money to lend. Borrowers would also have more money, so there would be less need to borrow. I can see how this would lower the interest rate but I don’t understand how it could go negative. Would not the pure rate of interest be dependent upon the amount of money available to lend and the desire of borrowers to borrow? Would not a negative interest rate mean that everyone has enough money to invest in all future projects and therefore no desire to borrow?
(Just finished your first boom and bust lecture, I am finding all of this very informative)

When the US was on the gold standard, what effect did the gold rush era have upon it? If the US was on the gold standard now and gold was discovered in Antartica, a huge amount equal to the worlds known reserves, would that have an adverse effect upon the US economy?

[pacopasa]

In this fixed currency system, if price deflation was 5% per year during a period of growth, then people would have more money in hand, more money to lend. Borrowers would also have more money, so there would be less need to borrow. I can see how this would lower the interest rate but I don’t understand how it could go negative. Would not the pure rate of interest be dependent upon the amount of money available to lend and the desire of borrowers to borrow? Would not a negative interest rate mean that everyone has enough money to invest in all future projects and therefore no desire to borrow?
(Just finished your first boom and bust lecture, I am finding all of this very informative)

[jmherbener]

Price deflation is the consequence of having a fixed money stock with an increasing money demand. There is no more money in society and thus, the increasing production of goods (which is the fruit of capital accumulation during periods of economic growth) implies that their prices must be lower. In such circumstances, people receive their higher standards of living in the form of lower prices of goods and not larger money incomes. Their money incomes might even decline, but their real incomes are rising. So people do not have more money to lend. The money stock is fixed.

If interest rates were negative, borrowers would want to borrow enormous amounts. Lending, however, would be nil. Given the option between holding onto $100 for a year and having $100 a year later and lending $100 to receive $95 back in a year, no one will lend. This is the reason the interest rate cannot be negative.

The pure rate of interest is independent of the stock of money. It is determined by time preferences alone. A person’s degree of time preference is manifest in the premium in the purchasing power of money in the future he requires to part with money of a given purchasing power in the present. For example, if a person has a 2 percent rate of time preference, then he requires $102 a year from now to be willing to lend $100 today when the purchasing power of money is the same a year from now as it is today. If the PPM is 5 percent lower a year from now, then for him to be willing to lend $100 today he would require $107 a year from now. In either case, the pure rate of interest is 2 percent.

[pacopasa]

Thank you Professor Herbener,
Regarding your first paragragh, it seems true that people would have “less” money to lend but would not the fact that the money has more purchasing power reduce the demand to borrow “more” money? Would it not end up a wash?

[pacopasa]

Is trading one’s labor, or anything else for that matter, for US fiat dollars simply buying a piece of stock of the US economy; is the dollar the equivalent of a US stock certificate?

[jmherbener]

No, stock is a claim to the equity of an enterprise, i.e., the difference between and enterprise’s Assets and Liabilities. If a company has $100 million in equity and 1 million shares of stock, then each share claims $100 of that equity. If that company went out of business and sold its assets and paid its liabilities, then each shareholder would own a share of the $100 million equity in proportion to the number of shares he owned.

The USD is not a claim to anything, let alone the equity of the Federal Government. Even if citizens held shares in the Federal government they would be worthless. The Federal government has unfunded liabilities of over $200 trillion dollars.

http://www.kotlikoff.net/sites/default/files/Kotlikoffbudgetcom2-25-2015.pdf

[pacopasa]

Thank you, that’s clear to me now. Read the article, sounds like the situation is significantly worse than it appears.

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