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The Money Supply and Economic Growth

Fabian_CH
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4/8/2011 8:35:10 AM
Posted: 5 years ago
So, here's something I've been wondering about.

Absent a central bank which creates money "out of thin air", i.e. just prints it - where would money come from?

Say, for example, we assume the gold standard, all money is either backed by gold or is gold.

What happens if the economy grows? I don't really see how the money supply could expand to match the new, higher amount of goods and services. Would any and all economic growth be "paid" by deflation?
"What are we doing? Do we want to feed a starved humanity in order to let it live? Or do we want to strangle its life in order to feed it?"
- Andrei Taganov, We The Living (Ayn Rand)
PARADIGM_L0ST
Posts: 6,958
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4/8/2011 9:19:23 AM
Posted: 5 years ago
At 4/8/2011 8:35:10 AM, Fabian_CH wrote:
So, here's something I've been wondering about.

Absent a central bank which creates money "out of thin air", i.e. just prints it - where would money come from?

Say, for example, we assume the gold standard, all money is either backed by gold or is gold.

What happens if the economy grows? I don't really see how the money supply could expand to match the new, higher amount of goods and services. Would any and all economic growth be "paid" by deflation?:

There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
"Have you ever considered suicide? If not, please do." -- Mouthwash (to Inferno)
Cody_Franklin
Posts: 9,483
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4/8/2011 9:29:07 AM
Posted: 5 years ago
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
At 4/8/2011 8:35:10 AM, Fabian_CH wrote:
So, here's something I've been wondering about.

Absent a central bank which creates money "out of thin air", i.e. just prints it - where would money come from?

Say, for example, we assume the gold standard, all money is either backed by gold or is gold.

What happens if the economy grows? I don't really see how the money supply could expand to match the new, higher amount of goods and services. Would any and all economic growth be "paid" by deflation?:

There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.

You're right that currency would be more valuable. You're incorrect in stating that it has "intrinsic value", however. Nothing has intrinsic value. The only reason currency is more valuable when limited is because there's a lower supply with static demand.
Fabian_CH
Posts: 232
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4/8/2011 10:33:37 AM
Posted: 5 years ago
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?
"What are we doing? Do we want to feed a starved humanity in order to let it live? Or do we want to strangle its life in order to feed it?"
- Andrei Taganov, We The Living (Ayn Rand)
Cody_Franklin
Posts: 9,483
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4/8/2011 12:34:31 PM
Posted: 5 years ago
At 4/8/2011 10:33:37 AM, Fabian_CH wrote:
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

Not true. It's more like growth --> deflation, not growth = deflation.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?

I personally think you were quite right in your estimation. All else equal, it goes like this: when supply of goods remains constant and supply of money increases, money loses value through inflation. When supply of money remains static and supply of goods increases, goods lose value (reflected by deflation).
Ore_Ele
Posts: 25,980
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4/8/2011 12:49:07 PM
Posted: 5 years ago
At 4/8/2011 12:34:31 PM, Cody_Franklin wrote:
At 4/8/2011 10:33:37 AM, Fabian_CH wrote:
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

Not true. It's more like growth --> deflation, not growth = deflation.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?

I personally think you were quite right in your estimation. All else equal, it goes like this: when supply of goods remains constant and supply of money increases, money loses value through inflation. When supply of money remains static and supply of goods increases, goods lose value (reflected by deflation).

to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.
"Wanting Red Rhino Pill to have gender"
Cody_Franklin
Posts: 9,483
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4/8/2011 1:21:22 PM
Posted: 5 years ago
At 4/8/2011 12:49:07 PM, OreEle wrote:
At 4/8/2011 12:34:31 PM, Cody_Franklin wrote:
At 4/8/2011 10:33:37 AM, Fabian_CH wrote:
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

Not true. It's more like growth --> deflation, not growth = deflation.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?

I personally think you were quite right in your estimation. All else equal, it goes like this: when supply of goods remains constant and supply of money increases, money loses value through inflation. When supply of money remains static and supply of goods increases, goods lose value (reflected by deflation).

to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

Oh, I know. I just assumed that anybody asking an economics question would be able to equate the two. :)

I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

That's not how you measure the value of a good, though. You measure a good's value in terms of what you have to give up in exchange, which almost always means in terms of how much you have to pay for it. They may be proportionate in terms of exchange-value decline, but that's only useful if you're doing differential shopping or are running a society based on the barter system. :P

So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.
Cody_Franklin
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4/8/2011 1:24:37 PM
Posted: 5 years ago
At 4/8/2011 1:21:22 PM, Cody_Franklin wrote:
At 4/8/2011 12:49:07 PM, OreEle wrote:
So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.

Also, I should point out that your theory of proportional change in comparative value is only true, interestingly, if it's true. It may very well be the case that producers and servicers don't react in a uniform manner to deflation.

Even if we take the whole "10 chairs to a bed" thing, you're assuming that all chairs have uniform value when, realistically, the exact same chair may fetch a different price depending on the comparisons you make. In one case, It might be 10 chairs/bed. In other case, it might be 13.6 chairs/bed.
Reasoning
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4/8/2011 2:03:29 PM
Posted: 5 years ago
At 4/8/2011 10:33:37 AM, Fabian_CH wrote:
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

As goods become more abundant the price falls. There's nothing wrong with that.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?

If the supply of money is constant but the demand increases then the price of money will rise. It's the same as any other good in that regard.
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
Ore_Ele
Posts: 25,980
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4/8/2011 2:15:03 PM
Posted: 5 years ago
At 4/8/2011 1:21:22 PM, Cody_Franklin wrote:
At 4/8/2011 12:49:07 PM, OreEle wrote:
At 4/8/2011 12:34:31 PM, Cody_Franklin wrote:
At 4/8/2011 10:33:37 AM, Fabian_CH wrote:
At 4/8/2011 9:19:23 AM, PARADIGM_L0ST wrote:
There is a finite amount of precious metals. Because there is a limited amount, possessing currency that is backed by gold is a whole lot more valuable than it is now.

Look at South American nations. 50,000 pesos is the equivalent to $5 U.S. This is because they print so much money that it devalues the currency. But if those dollars or pesos had a finite amount, they would be so much more valuable because there would be an intrinsic value to it.
Isn't that what I asked though? Currency becomes more valuable, thus economic growth equals deflation.

Not true. It's more like growth --> deflation, not growth = deflation.

What I'm really asking is... How does a finite money supply really handle a (potentially infinite) increase in the amount of goods and services?

I personally think you were quite right in your estimation. All else equal, it goes like this: when supply of goods remains constant and supply of money increases, money loses value through inflation. When supply of money remains static and supply of goods increases, goods lose value (reflected by deflation).

to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

Oh, I know. I just assumed that anybody asking an economics question would be able to equate the two. :)

You know what happens you you "assumed," you make an a$$ our of...um...Ed. Though I'm not sure who Ed is.


I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

That's not how you measure the value of a good, though. You measure a good's value in terms of what you have to give up in exchange, which almost always means in terms of how much you have to pay for it. They may be proportionate in terms of exchange-value decline, but that's only useful if you're doing differential shopping or are running a society based on the barter system. :P

No, but what I'm saying is that companies would see a 40% drop in sales (because of the deflation) when measured in the money (again, we are assuming that is the only change), but they'll also see a 40% drop in the value of all assets (except for any cash on hand or in the bank). And a 40% drop in expenses (except for any money owed to through loans or bonds). And also see a 40% drop in their net profits. But that doesn't mean that the company is doing worse and starting to fail (where as if a company's profits dropped 40%, it would be hell on their stock value).


So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.

Yes, this is great for anyone that owns the currency. Utterly horrible for anyone that has debt.

Which, sadly, many many people have.
"Wanting Red Rhino Pill to have gender"
Cody_Franklin
Posts: 9,483
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4/8/2011 4:00:59 PM
Posted: 5 years ago
At 4/8/2011 2:15:03 PM, OreEle wrote:
At 4/8/2011 1:21:22 PM, Cody_Franklin wrote:
At 4/8/2011 12:49:07 PM, OreEle wrote:
to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

Oh, I know. I just assumed that anybody asking an economics question would be able to equate the two. :)

You know what happens you you "assumed," you make an a$$ our of...um...Ed. Though I'm not sure who Ed is.

InfraRedEd... :|


I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

That's not how you measure the value of a good, though. You measure a good's value in terms of what you have to give up in exchange, which almost always means in terms of how much you have to pay for it. They may be proportionate in terms of exchange-value decline, but that's only useful if you're doing differential shopping or are running a society based on the barter system. :P

No, but what I'm saying is that companies would see a 40% drop in sales (because of the deflation) when measured in the money (again, we are assuming that is the only change), but they'll also see a 40% drop in the value of all assets (except for any cash on hand or in the bank). And a 40% drop in expenses (except for any money owed to through loans or bonds). And also see a 40% drop in their net profits. But that doesn't mean that the company is doing worse and starting to fail (where as if a company's profits dropped 40%, it would be hell on their stock value).

I'm not sure what you're trying to get at here.


So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.

Yes, this is great for anyone that owns the currency. Utterly horrible for anyone that has debt.

Which, sadly, many many people have.

Good incentive not to get into debt, isn't it? :P
Ore_Ele
Posts: 25,980
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4/8/2011 4:06:27 PM
Posted: 5 years ago
At 4/8/2011 4:00:59 PM, Cody_Franklin wrote:
At 4/8/2011 2:15:03 PM, OreEle wrote:
At 4/8/2011 1:21:22 PM, Cody_Franklin wrote:
At 4/8/2011 12:49:07 PM, OreEle wrote:
to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

Oh, I know. I just assumed that anybody asking an economics question would be able to equate the two. :)

You know what happens you you "assumed," you make an a$$ our of...um...Ed. Though I'm not sure who Ed is.

InfraRedEd... :|

"assumed" = "a$$-um-ed"

okay, so it was a bad pun.



I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

That's not how you measure the value of a good, though. You measure a good's value in terms of what you have to give up in exchange, which almost always means in terms of how much you have to pay for it. They may be proportionate in terms of exchange-value decline, but that's only useful if you're doing differential shopping or are running a society based on the barter system. :P

No, but what I'm saying is that companies would see a 40% drop in sales (because of the deflation) when measured in the money (again, we are assuming that is the only change), but they'll also see a 40% drop in the value of all assets (except for any cash on hand or in the bank). And a 40% drop in expenses (except for any money owed to through loans or bonds). And also see a 40% drop in their net profits. But that doesn't mean that the company is doing worse and starting to fail (where as if a company's profits dropped 40%, it would be hell on their stock value).

I'm not sure what you're trying to get at here.

Just pointing out that measuring by using the dollar is not always accurate.



So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.

Yes, this is great for anyone that owns the currency. Utterly horrible for anyone that has debt.

Which, sadly, many many people have.

Good incentive not to get into debt, isn't it? :P

It is a good incentive, however the reverse is true, with inflation (that going into debt can be good). But then, that is just all about manipulating markets.
"Wanting Red Rhino Pill to have gender"
Grape
Posts: 989
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4/8/2011 4:10:26 PM
Posted: 5 years ago
Realize that it is totally natural that if the economy grows, things would becoming cheaper (as in, easier to afford). A wheelbarrow is much easier to acquire now than it was 1000 years ago, and consequently it should cost less. If the money supply never expanded, everything would become cheaper over time as the economy grew. That would reflect the fact that people are now wealthier and can afford more things. The reason that the money goes down rather than up in value is that the money supply is expanded at a greater rate than the rate of economic growth.
Cody_Franklin
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4/8/2011 4:22:48 PM
Posted: 5 years ago
At 4/8/2011 4:06:27 PM, OreEle wrote:
At 4/8/2011 4:00:59 PM, Cody_Franklin wrote:
At 4/8/2011 2:15:03 PM, OreEle wrote:
At 4/8/2011 1:21:22 PM, Cody_Franklin wrote:
At 4/8/2011 12:49:07 PM, OreEle wrote:
to be expanded, the goods lose value because the money become worth more (so $20 in your pocket can buy more after deflation, than it could before deflation).

Oh, I know. I just assumed that anybody asking an economics question would be able to equate the two. :)

You know what happens you you "assumed," you make an a$$ our of...um...Ed. Though I'm not sure who Ed is.

InfraRedEd... :|

"assumed" = "a$$-um-ed"

okay, so it was a bad pun.

.................................. You're a terrible person.

But you have to admit that my take on it fits.



I find that the goods don't actually have less value, since when weighed against other goods (that grew at the same rate) they remain equal.

That's not how you measure the value of a good, though. You measure a good's value in terms of what you have to give up in exchange, which almost always means in terms of how much you have to pay for it. They may be proportionate in terms of exchange-value decline, but that's only useful if you're doing differential shopping or are running a society based on the barter system. :P

No, but what I'm saying is that companies would see a 40% drop in sales (because of the deflation) when measured in the money (again, we are assuming that is the only change), but they'll also see a 40% drop in the value of all assets (except for any cash on hand or in the bank). And a 40% drop in expenses (except for any money owed to through loans or bonds). And also see a 40% drop in their net profits. But that doesn't mean that the company is doing worse and starting to fail (where as if a company's profits dropped 40%, it would be hell on their stock value).

I'm not sure what you're trying to get at here.

Just pointing out that measuring by using the dollar is not always accurate.

It is if you sidestep nominal value at first to adjust for deflation. :)



So if a bed was worth $500 and a chair was worth $50, you could say a bed is worth 10 chairs. If we have deflation, and the bed is now worth $300 and the chair is now worth $30, the bed is still worth 10 chairs. The money, which really only serves as a highly liquidable medium for transactions, is the only thing that is changing, not the actual value of the currency.

Yeah, except our economy doesn't run on chairs or beds--it runs on a far more convenient medium of exchange, which is currency. If you're in a barter system whose exchange proportions remain constant, then, yeah, nothing loses any value, because a bed will always be worth ten chairs. You can measure the value change either way, though. The important thing that needs to be understood is simply that supply of goods increases while supply of money remains constant, which means less money expended for goods. This is actually a good thing for anyone who possesses currency, since their economic power increases in proportion to the deflation of currency. Whether you call this goods losing value or money gaining value is, I suppose, dependent on which side of the transaction you're on.

Yes, this is great for anyone that owns the currency. Utterly horrible for anyone that has debt.

Which, sadly, many many people have.

Good incentive not to get into debt, isn't it? :P

It is a good incentive, however the reverse is true, with inflation (that going into debt can be good). But then, that is just all about manipulating markets.

Yeah, but the lack of a Fed or central bank lessens the threat of really harmful inflation. For people who currently have debt, inflation is nice, though. Unfortunately, it's a big drop in value everywhere else. :P
Fabian_CH
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4/8/2011 4:27:07 PM
Posted: 5 years ago
At 4/8/2011 4:06:27 PM, OreEle wrote:
But then, that is just all about manipulating markets.
What do you mean?

At 4/8/2011 4:10:26 PM, Grape wrote:
Realize that it is totally natural that if the economy grows, things would becoming cheaper (as in, easier to afford). A wheelbarrow is much easier to acquire now than it was 1000 years ago, and consequently it should cost less. If the money supply never expanded, everything would become cheaper over time as the economy grew. That would reflect the fact that people are now wealthier and can afford more things. The reason that the money goes down rather than up in value is that the money supply is expanded at a greater rate than the rate of economic growth.
Ok, I guess that makes sense :)
"What are we doing? Do we want to feed a starved humanity in order to let it live? Or do we want to strangle its life in order to feed it?"
- Andrei Taganov, We The Living (Ayn Rand)
darkkermit
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4/8/2011 7:56:47 PM
Posted: 5 years ago
At 4/8/2011 4:10:26 PM, Grape wrote:
Realize that it is totally natural that if the economy grows, things would becoming cheaper (as in, easier to afford). A wheelbarrow is much easier to acquire now than it was 1000 years ago, and consequently it should cost less. If the money supply never expanded, everything would become cheaper over time as the economy grew. That would reflect the fact that people are now wealthier and can afford more things. The reason that the money goes down rather than up in value is that the money supply is expanded at a greater rate than the rate of economic growth.

doesn't that punish investing? If deflation occurs, how can one be expected to pay off a debt with interest. Plus, consumers would be less likely to spend since they can get more for less if they just save. Basically a money supply that doesn't grow is just begging for a recession.
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TheAtheistAllegiance
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4/8/2011 7:59:48 PM
Posted: 5 years ago
At 4/8/2011 2:03:29 PM, Reasoning wrote:

As goods become more abundant the price falls. There's nothing wrong with that.

Wouldn't deflation, like inflation, hit certain industries with different impacts (asymmetry), which could be damaging? If the automobile industry takes a hit in profits, but the costs of raw materials don't change much, and general living expenses don't react in the same manner either, couldn't this cause market instability?

Also, doesn't deflation discourage investment, in that it's heavily reliant on loans?
Fabian_CH
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4/8/2011 8:16:18 PM
Posted: 5 years ago
At 4/8/2011 7:59:48 PM, TheAtheistAllegiance wrote:
At 4/8/2011 2:03:29 PM, Reasoning wrote:

As goods become more abundant the price falls. There's nothing wrong with that.

Wouldn't deflation, like inflation, hit certain industries with different impacts (asymmetry), which could be damaging? If the automobile industry takes a hit in profits, but the costs of raw materials don't change much, and general living expenses don't react in the same manner either, couldn't this cause market instability?
And build less cars? Yay green utopia! :)

Why do you think that the status quo for any industry is ideal in the future? Why woud it be a bad thing if one profitable industry grew and perhaps others don't turn out to be as profitable and shrink?
"What are we doing? Do we want to feed a starved humanity in order to let it live? Or do we want to strangle its life in order to feed it?"
- Andrei Taganov, We The Living (Ayn Rand)
TheAtheistAllegiance
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4/8/2011 8:23:23 PM
Posted: 5 years ago
At 4/8/2011 8:16:18 PM, Fabian_CH wrote:
At 4/8/2011 7:59:48 PM, TheAtheistAllegiance wrote:

Wouldn't deflation, like inflation, hit certain industries with different impacts (asymmetry), which could be damaging? If the automobile industry takes a hit in profits, but the costs of raw materials don't change much, and general living expenses don't react in the same manner either, couldn't this cause market instability?
And build less cars? Yay green utopia! :)

Why do you think that the status quo for any industry is ideal in the future? Why woud it be a bad thing if one profitable industry grew and perhaps others don't turn out to be as profitable and shrink?

You missed the point. I'm not saying that the current shape and composition of industry should remain static forever, but that deflation might serve as a recipe for market instability, just as inflation might.
Fabian_CH
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4/8/2011 8:28:49 PM
Posted: 5 years ago
At 4/8/2011 8:23:23 PM, TheAtheistAllegiance wrote:
You missed the point. I'm not saying that the current shape and composition of industry should remain static forever, but that deflation might serve as a recipe for market instability, just as inflation might.
What is market instability, then?
"What are we doing? Do we want to feed a starved humanity in order to let it live? Or do we want to strangle its life in order to feed it?"
- Andrei Taganov, We The Living (Ayn Rand)
TheAtheistAllegiance
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4/8/2011 9:25:56 PM
Posted: 5 years ago
At 4/8/2011 8:28:49 PM, Fabian_CH wrote:
At 4/8/2011 8:23:23 PM, TheAtheistAllegiance wrote:
You missed the point. I'm not saying that the current shape and composition of industry should remain static forever, but that deflation might serve as a recipe for market instability, just as inflation might.
What is market instability, then?

The likelihood that the market could go into a recession. It's kinda a vague term, but it's traditionally not a good thing.
Silver_Falcon
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4/21/2011 2:37:51 PM
Posted: 5 years ago
Well, there is nothing wrong with deflation as long as it is rather stable. Lot of kinds of stuff gets cheaper and cheaper (electronics for example) and the investors and entrepreneurs count with it in their business plans and future predictions. The recession that comes with sudden strong deflation is because of most people are caught off guard. When entrepreneurs planned for inflation and deflation comes -> they loose money.

Deflation and inflation in long term have influence on savings and resources (mis)usage. During deflation, you are awarded for not consuming. During inflation, you are constantly punished for not consuming.