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Why would debt-free money cause inflation?

Apparelled
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2/9/2014 9:10:36 PM
Posted: 2 years ago
What I don't understand is why there is this belief that, if a government stops borrowing money from private banks (at interest), and starts creating its own money that is interest free, that it would somehow cause an uncontrolled inflationary effect.

Seriously I cannot find any evidence anywhere to prove this to be true. I can only find reasons why increasing the money supply would cause inflation, as seen in this video http://youtu.be.... But we currently employ the practice of increasing or decreasing the money supply in a debt based monetary system. So why would it fall apart in an interest free system.

So if someone can please clarify this in laymen's terms, I truly want to understand this. I am currently flooded with information on how debt free money will not cause inflation.
DanT
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2/10/2014 11:41:37 AM
Posted: 2 years ago
At 2/9/2014 9:10:36 PM, Apparelled wrote:
What I don't understand is why there is this belief that, if a government stops borrowing money from private banks (at interest), and starts creating its own money that is interest free, that it would somehow cause an uncontrolled inflationary effect.

Seriously I cannot find any evidence anywhere to prove this to be true. I can only find reasons why increasing the money supply would cause inflation, as seen in this video http://youtu.be.... But we currently employ the practice of increasing or decreasing the money supply in a debt based monetary system. So why would it fall apart in an interest free system.

So if someone can please clarify this in laymen's terms, I truly want to understand this. I am currently flooded with information on how debt free money will not cause inflation.

Inflation = the % change in Price = the % change (Cash + Deposits) + the % change in the velocity of money - the % change in transactions.

This is because Price = (Cash + Deposits) x the velocity of money / transactions.

Money is a medium of exchange, and so the demand for money depends on the need to facilitate trade. In a way money can be seen as a share of the aggregate output; whereby $1 = 1 share of the American economy. The more shares there are the less a single share is worth.

If the monetary supply does not increase fast enough to facilitate transactions deflation (prices drop) occurs, but if the monetary supply increases too fast it causes inflation (prices rise).

So Let's say the volume of transactions is fixed, and the economy is always trading at the same rate, with a constant monetary velocity of 1. If output is 100,000 and there is $10,000 in the economy, each $1 is worth a 10% share of the economy. If the monetary supply doubles it is worth 20%, and if it is reduced by half it is worth 5%.

Price is simply the exchange rate between transactions and the monetary supply. The greater the supply of money the less the money will be worth, and therefore the more the money is required to make a purchase.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Apparelled
Posts: 19
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2/10/2014 4:28:37 PM
Posted: 2 years ago
Inflation = the % change in Price = the % change (Cash + Deposits) + the % change in the velocity of money - the % change in transactions.

This is because Price = (Cash + Deposits) x the velocity of money / transactions.

Money is a medium of exchange, and so the demand for money depends on the need to facilitate trade. In a way money can be seen as a share of the aggregate output; whereby $1 = 1 share of the American economy. The more shares there are the less a single share is worth.

If the monetary supply does not increase fast enough to facilitate transactions deflation (prices drop) occurs, but if the monetary supply increases too fast it causes inflation (prices rise).

So Let's say the volume of transactions is fixed, and the economy is always trading at the same rate, with a constant monetary velocity of 1. If output is 100,000 and there is $10,000 in the economy, each $1 is worth a 10% share of the economy. If the monetary supply doubles it is worth 20%, and if it is reduced by half it is worth 5%.

Price is simply the exchange rate between transactions and the monetary supply. The greater the supply of money the less the money will be worth, and therefore the more the money is required to make a purchase.

I'm not sure you understood the question. I do understand inflation, what I don't understand is why , if a government was to stop borrowing money at interest and start printing its own money (interest free), how would that be inflationary?

And from what I understand, if a government borrows money at interest, let's just say $100. The money is "created" by the private bank and interest is charged on that $100 (let's say at 5%). So the government now has $100, but it owes $105 back to the bank, $5 of which does not exist yet. The government then spends the $100 on whatever it needed the money for in the first place. So in order for the government to pay back the principle and interest it must borrow another $105 on top of the original $100. The government now owes the banks $210.25 ($105 + $105.25) and only $205 of money exists to pay that debt off. So then the government borrows $210.25 to pay that debt off...and so on...and so on...
So to me it would appear that a system that requires the government to borrow money at interest is in fact inflationary as it causes an endless cycle of needlessly creating money. What I don't understand is why many economists and politicians state that if the government were to stop borrowing the money from private banks, and start creating the money internally without interest (because why would you charge yourself interest), that this would some how cause an inflationary effect?
Does that clarify my question?
Leanin_on_Slick
Posts: 62
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2/10/2014 11:24:07 PM
Posted: 2 years ago
At 2/9/2014 9:10:36 PM, Apparelled wrote:
What I don't understand is why there is this belief that, if a government stops borrowing money from private banks (at interest), and starts creating its own money that is interest free, that it would somehow cause an uncontrolled inflationary effect.

Seriously I cannot find any evidence anywhere to prove this to be true. I can only find reasons why increasing the money supply would cause inflation, as seen in this video http://youtu.be.... But we currently employ the practice of increasing or decreasing the money supply in a debt based monetary system. So why would it fall apart in an interest free system.

So if someone can please clarify this in laymen's terms, I truly want to understand this. I am currently flooded with information on how debt free money will not cause inflation.

Hmm, it's pretty well documented that as you increase your money supply the more you risk inflation. Several nations in history have run into this problem, such as Britian near the end of its glory days as the world power. Inflation is a monetary phenomena that in the long-run is effected by growth in the money supply.
sadolite
Posts: 8,836
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2/11/2014 12:27:12 AM
Posted: 2 years ago
"I'm not sure you understood the question."

The very same thought cam to my mind. I wish I could answer the question. But like you said "there is no evidence" I will watch this thread closely for possible answers and check them out for myself to verify.
It's not your views that divide us, it's what you think my views should be that divides us.

If you think I will give up my rights and forsake social etiquette to make you "FEEL" better you are sadly mistaken

If liberal democrats would just stop shooting people gun violence would drop by 90%
DanT
Posts: 5,693
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2/11/2014 10:44:35 AM
Posted: 2 years ago
At 2/10/2014 4:28:37 PM, Apparelled wrote:
Inflation = the % change in Price = the % change (Cash + Deposits) + the % change in the velocity of money - the % change in transactions.

This is because Price = (Cash + Deposits) x the velocity of money / transactions.

Money is a medium of exchange, and so the demand for money depends on the need to facilitate trade. In a way money can be seen as a share of the aggregate output; whereby $1 = 1 share of the American economy. The more shares there are the less a single share is worth.

If the monetary supply does not increase fast enough to facilitate transactions deflation (prices drop) occurs, but if the monetary supply increases too fast it causes inflation (prices rise).

So Let's say the volume of transactions is fixed, and the economy is always trading at the same rate, with a constant monetary velocity of 1. If output is 100,000 and there is $10,000 in the economy, each $1 is worth a 10% share of the economy. If the monetary supply doubles it is worth 20%, and if it is reduced by half it is worth 5%.

Price is simply the exchange rate between transactions and the monetary supply. The greater the supply of money the less the money will be worth, and therefore the more the money is required to make a purchase.

I'm not sure you understood the question. I do understand inflation, what I don't understand is why , if a government was to stop borrowing money at interest and start printing its own money (interest free), how would that be inflationary?

And from what I understand, if a government borrows money at interest, let's just say $100. The money is "created" by the private bank and interest is charged on that $100 (let's say at 5%). So the government now has $100, but it owes $105 back to the bank, $5 of which does not exist yet. The government then spends the $100 on whatever it needed the money for in the first place. So in order for the government to pay back the principle and interest it must borrow another $105 on top of the original $100. The government now owes the banks $210.25 ($105 + $105.25) and only $205 of money exists to pay that debt off. So then the government borrows $210.25 to pay that debt off...and so on...and so on...
So to me it would appear that a system that requires the government to borrow money at interest is in fact inflationary as it causes an endless cycle of needlessly creating money. What I don't understand is why many economists and politicians state that if the government were to stop borrowing the money from private banks, and start creating the money internally without interest (because why would you charge yourself interest), that this would some how cause an inflationary effect?
Does that clarify my question?

I think you misunderstand how it works.

1st off, inflation is negatively related to changes in the interest rate; as the interest rate drops inflation rises, and as the interest rate rises, inflation drops. Higher interest rates encourage bond purchases, because it increases payoff, while lower interest rates discourages bond purchases. The more bonds that are issued, the less payout one can receive from a bond.

Deficit spending = Government spending - Taxes = the change in the monetary base + the Change in Government Bonds

By law, in order for the government to increase the monetary base they must have securities to back it up. This is typically done by issuing bonds.
The monetary base is not the same thing as the money.

Money = Cash + Deposits. The Monetary Base = Cash + Reserves. The Money
The monetary base is connected to the monetary supply through the money multiplier.
Money = the Money Multiplier x the Monetary Base.
The Money Multiplier = (1 + Cash per Deposits) / (Reserves + Cash per Deposits)

An increased monetary base will eventually lead to an increase in the monetary supply over time, thus causing inflation, but that does not mean the monetary base is the sole cause of inflation. Inflation occurs due to changes in the monetary supply regardless of whether or not the monetary base has changed.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
sadolite
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2/11/2014 4:28:24 PM
Posted: 2 years ago
At 2/11/2014 10:44:35 AM, DanT wrote:
At 2/10/2014 4:28:37 PM, Apparelled wrote:
Inflation = the % change in Price = the % change (Cash + Deposits) + the % change in the velocity of money - the % change in transactions.

This is because Price = (Cash + Deposits) x the velocity of money / transactions.

Money is a medium of exchange, and so the demand for money depends on the need to facilitate trade. In a way money can be seen as a share of the aggregate output; whereby $1 = 1 share of the American economy. The more shares there are the less a single share is worth.

If the monetary supply does not increase fast enough to facilitate transactions deflation (prices drop) occurs, but if the monetary supply increases too fast it causes inflation (prices rise).

So Let's say the volume of transactions is fixed, and the economy is always trading at the same rate, with a constant monetary velocity of 1. If output is 100,000 and there is $10,000 in the economy, each $1 is worth a 10% share of the economy. If the monetary supply doubles it is worth 20%, and if it is reduced by half it is worth 5%.

Price is simply the exchange rate between transactions and the monetary supply. The greater the supply of money the less the money will be worth, and therefore the more the money is required to make a purchase.

I'm not sure you understood the question. I do understand inflation, what I don't understand is why , if a government was to stop borrowing money at interest and start printing its own money (interest free), how would that be inflationary?

And from what I understand, if a government borrows money at interest, let's just say $100. The money is "created" by the private bank and interest is charged on that $100 (let's say at 5%). So the government now has $100, but it owes $105 back to the bank, $5 of which does not exist yet. The government then spends the $100 on whatever it needed the money for in the first place. So in order for the government to pay back the principle and interest it must borrow another $105 on top of the original $100. The government now owes the banks $210.25 ($105 + $105.25) and only $205 of money exists to pay that debt off. So then the government borrows $210.25 to pay that debt off...and so on...and so on...
So to me it would appear that a system that requires the government to borrow money at interest is in fact inflationary as it causes an endless cycle of needlessly creating money. What I don't understand is why many economists and politicians state that if the government were to stop borrowing the money from private banks, and start creating the money internally without interest (because why would you charge yourself interest), that this would some how cause an inflationary effect?
Does that clarify my question?

I think you misunderstand how it works.

1st off, inflation is negatively related to changes in the interest rate; as the interest rate drops inflation rises, and as the interest rate rises, inflation drops. Higher interest rates encourage bond purchases, because it increases payoff, while lower interest rates discourages bond purchases. The more bonds that are issued, the less payout one can receive from a bond.

Deficit spending = Government spending - Taxes = the change in the monetary base + the Change in Government Bonds

By law, in order for the government to increase the monetary base they must have securities to back it up. This is typically done by issuing bonds.
The monetary base is not the same thing as the money.

Money = Cash + Deposits. The Monetary Base = Cash + Reserves. The Money
The monetary base is connected to the monetary supply through the money multiplier.
Money = the Money Multiplier x the Monetary Base.
The Money Multiplier = (1 + Cash per Deposits) / (Reserves + Cash per Deposits)

An increased monetary base will eventually lead to an increase in the monetary supply over time, thus causing inflation, but that does not mean the monetary base is the sole cause of inflation. Inflation occurs due to changes in the monetary supply regardless of whether or not the monetary base has changed.

What is the difference between issuing bonds that will never be paid back plus interest and just printing money? Both are equally worthless so why tack on interest to something that has no intention of being paid back in the first place. The US govt will default on the bonds it has issued. It technically already has. It just issues bonds to pay bonds. That's called a ponzi scheme. It doesn't even collect enough revenue to cover it's unfunded mandates let alone pay interest on any kind of debt, namely the worthless treasury bonds it issues to pay the interest on the last treasury bonds in issued. The house of "frauds" will fall, it is 100%
It's not your views that divide us, it's what you think my views should be that divides us.

If you think I will give up my rights and forsake social etiquette to make you "FEEL" better you are sadly mistaken

If liberal democrats would just stop shooting people gun violence would drop by 90%
Apparelled
Posts: 19
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2/11/2014 4:47:47 PM
Posted: 2 years ago
An increased monetary base will eventually lead to an increase in the monetary supply over time, thus causing inflation, but that does not mean the monetary base is the sole cause of inflation. Inflation occurs due to changes in the monetary supply regardless of whether or not the monetary base has changed.

You are correct when you say I don't know how it works. But you are still not clarifying it for me. So if you did explain the answer to my question earlier, I apologize as I have a limited understanding of this issue. But just in case I shall reword my question, in hopes of allowing a simpler answer.

If the government was to create its own money, as opposed to borrowing it (at interest) from a central bank, for what reason would this increase the amount of money in circulation thereby causing inflation? This is what I want to know

If I explain what I am aware of, perhaps that will help. First off I will use the American system as an example (as I am not sure if you are aware of the Canadian system).

The federal reserve, which is a private organization (not at all government), issues currency to the American government in exchange for government bonds. The American government is then required to pay that bond back to the federal reserve with interest. So let's review the federal reserve. Where does it get the money from so that it can give it to the government? Nowhere, they create it, as in they increase the monetary supply (which as you explained is inflationary). And when you realize that the government must now pay that money back with interest and is going to be required to borrow more money (with interest) to cover the interest of this debt. So now more money is created (inflation) over and over again just to pay off interest. So the cycle of inflation is infinite.

In comparison , if the government created its own bank, owned by the citizens of America, and used that bank to create money. So the government would issue a bond (interest free), to the government owned bank and in return receive money (adding to the monetary supply)(inflation) . At this point the government only owes back to itself the equivalent of what it borrowed, not causing the need the create more money to repay the debt (sustainable). This is a finite cause of inflation. So if what I just described is showing that inflation is more controllable, where does it become uncontrollable?

Please try and keep it simple.
DanT
Posts: 5,693
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2/11/2014 10:28:33 PM
Posted: 2 years ago
At 2/11/2014 4:47:47 PM, Apparelled wrote:
An increased monetary base will eventually lead to an increase in the monetary supply over time, thus causing inflation, but that does not mean the monetary base is the sole cause of inflation. Inflation occurs due to changes in the monetary supply regardless of whether or not the monetary base has changed.

You are correct when you say I don't know how it works. But you are still not clarifying it for me. So if you did explain the answer to my question earlier, I apologize as I have a limited understanding of this issue. But just in case I shall reword my question, in hopes of allowing a simpler answer.


The simplest way I can explain it is that inflation is caused by an increase in the monetary supply, which consists of Coins, Bank Notes, and Transactional Accounts Balances.

Inflation is a measurement of the rate of change in price, and when prices inflate (go up) interest rates drop. When Interest rates are at zero or near zero, prices are at their maximum sustainable point.

If the government printed money without a central bank backing up the money with a monetary base, than inflation would still occur because the increase in coins and bank notes would cause an increase in the monetary supply.

If the government was to create its own money, as opposed to borrowing it (at interest) from a central bank, for what reason would this increase the amount of money in circulation thereby causing inflation? This is what I want to know


OK what you are proposing is to eliminate reserves (deposits held in the central bank). Thus the monetary base would only consist of cash in circulation. The monetary base has nothing to do with inflation, other than its ability to influence the money stock over time. The money stock consists of Coins, Bank Notes, and Transactional Accounts Balances. By increasing cash (Coins and Bank notes) you directly increase the money stock, thus you increase inflation even faster than if you had a reserve requirement.

If I explain what I am aware of, perhaps that will help. First off I will use the American system as an example (as I am not sure if you are aware of the Canadian system).

The federal reserve, which is a private organization (not at all government), issues currency to the American government in exchange for government bonds.

Not how it works. The US department of the treasury creates money, but by law they must have securities to back it up. The FED only puts the money into circulation, they don't create money. The FED buys bonds (securities) from the government, so that the government can increase the Reserves; they do not print more cash.

The American government is then required to pay that bond back to the federal reserve with interest. So let's review the federal reserve. Where does it get the money from so that it can give it to the government?

The FED pays for the securities by crediting the account of the Federal Government within the central bank; in other words the securities are paid for by increasing the Reserves by the same amount. The Reserves only effect the Monetary Base in the short run, but it impacts the Monetary Supply in the long term through fractional reserve banking.

Nowhere, they create it, as in they increase the monetary supply (which as you explained is inflationary).
No they increase the reserves. The monetary supply (Cash + Deposits) is not increased, only the monetary base (Cash + Reserves).
And when you realize that the government must now pay that money back with interest and is going to be required to borrow more money (with interest) to cover the interest of this debt. So now more money is created (inflation) over and over again just to pay off interest. So the cycle of inflation is infinite.

The FED is non-profit. All of the FED's operating profits go back to the Department of the Treasury.
In comparison , if the government created its own bank, owned by the citizens of America, and used that bank to create money. So the government would issue a bond (interest free), to the government owned bank and in return receive money (adding to the monetary supply)(inflation) . At this point the government only owes back to itself the equivalent of what it borrowed, not causing the need the create more money to repay the debt (sustainable). This is a finite cause of inflation. So if what I just described is showing that inflation is more controllable, where does it become uncontrollable?

Please try and keep it simple.

Other than increasing cash rather than reserves, that is already what is taking place. The FED is not privately owned; it is an independent corporation within the government, much like the US post office.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
B0NEDUDE
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2/12/2014 12:05:22 AM
Posted: 2 years ago
DanT swiss cheese theory of money.

"If the government printed money without a central bank backing up the money with a monetary base, than inflation would still occur because the increase in coins and bank notes would cause an increase in the monetary supply."

Backing up money? Monetary Base? Are you talking about gold or silver?

Printing a dollor for every dollar you print and storing it in a "base" is USELESS and irrelevant to the ECONOMY. Just as useless as Gold or Silver is today.

You have failed to explain why debt free money is bad. In fact, your not even making sense. You mind as well say because it is MAGIC.
DanT
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2/12/2014 3:05:04 AM
Posted: 2 years ago
At 2/12/2014 12:05:22 AM, B0NEDUDE wrote:
DanT swiss cheese theory of money.

"If the government printed money without a central bank backing up the money with a monetary base, than inflation would still occur because the increase in coins and bank notes would cause an increase in the monetary supply."

Backing up money? Monetary Base? Are you talking about gold or silver?

No. I am talking about a monetary base. The monetary base is comprised of cash (coins and banknotes in circulation) and Reserves (deposits within the central bank). The monetary supply aka Money stock is comprised of cash (coins and banknotes in circulation) and Deposits (Transactional Accounts within commercial banks).

Printing a dollor for every dollar you print and storing it in a "base" is USELESS and irrelevant to the ECONOMY. Just as useless as Gold or Silver is today.

You have failed to explain why debt free money is bad. In fact, your not even making sense. You mind as well say because it is MAGIC.

If you actually read what I said, it would make sense. I already explained what I meant by "monetary base", yet you seem to think that I am talking about commodity money.

When the government increases the monetary supply through reserves at a central bank, they simply increase the monetary base without causing inflation, and fractional banking by the commercial banks cause the monetary supply to grow due to the larger excess reserves, thereby creating inflation.

When the government increases the monetary supply through printing and coining more cash, they directly impact the monetary supply, thereby directly causing inflation.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
B0NEDUDE
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2/12/2014 9:47:19 AM
Posted: 2 years ago
DanT "When the government increases the monetary supply through reserves at a central bank, they simply increase the monetary base without causing inflation, and fractional banking by the commercial banks cause the monetary supply to grow due to the larger excess reserves, thereby creating inflation.

When the government increases the monetary supply through printing and coining more cash, they directly impact the monetary supply, thereby directly causing inflation."

Ok, I see what your are doing. It is a straw man & red herring argument.

First, you are comparing TWO seperate things: Printing money & issuing money.

Second, you use a double-standard when showing the Gov. issuing money vs. the fed res. which both increase the money supply when ISSUED.

The fact that the Gov doesnt save a dollor for every dollar is IRRELEVANT so long as they have the needed SUPPLIES to physically MAKE the money (Which is debt free & transparent in its spending).

Hopefully this will be the final nail in that coffin...
wrichcirw
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2/13/2014 8:38:11 AM
Posted: 2 years ago
At 2/9/2014 9:10:36 PM, Apparelled wrote:
What I don't understand is why there is this belief that, if a government stops borrowing money from private banks (at interest), and starts creating its own money that is interest free, that it would somehow cause an uncontrolled inflationary effect.

Seriously I cannot find any evidence anywhere to prove this to be true. I can only find reasons why increasing the money supply would cause inflation, as seen in this video http://youtu.be.... But we currently employ the practice of increasing or decreasing the money supply in a debt based monetary system. So why would it fall apart in an interest free system.

So if someone can please clarify this in laymen's terms, I truly want to understand this. I am currently flooded with information on how debt free money will not cause inflation.

The way I view this, while the government borrows money, there's an implicit obligation that the government will pay this money back. This deleveraging process would not be inflationary...there's always this process that will keep inflation in check.

If however instead of borrowing money, the government just went ahead and printed money, well that's inflation by definition. The idea is that if the government got used to just printing money whenever it needed it, there would be no debtholders that would hold the government in check, and so they would simply print, and often.

Not sure how interest would be relevant to this concept. It would be a different issue I would think, mainly dealing with the veracity of the currency in question.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
Juris_Naturalis
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2/13/2014 9:04:04 AM
Posted: 2 years ago
At 2/10/2014 4:28:37 PM, Apparelled wrote:
Inflation = the % change in Price = the % change (Cash + Deposits) + the % change in the velocity of money - the % change in transactions.

This is because Price = (Cash + Deposits) x the velocity of money / transactions.

Money is a medium of exchange, and so the demand for money depends on the need to facilitate trade. In a way money can be seen as a share of the aggregate output; whereby $1 = 1 share of the American economy. The more shares there are the less a single share is worth.

If the monetary supply does not increase fast enough to facilitate transactions deflation (prices drop) occurs, but if the monetary supply increases too fast it causes inflation (prices rise).

So Let's say the volume of transactions is fixed, and the economy is always trading at the same rate, with a constant monetary velocity of 1. If output is 100,000 and there is $10,000 in the economy, each $1 is worth a 10% share of the economy. If the monetary supply doubles it is worth 20%, and if it is reduced by half it is worth 5%.

Price is simply the exchange rate between transactions and the monetary supply. The greater the supply of money the less the money will be worth, and therefore the more the money is required to make a purchase.

I'm not sure you understood the question. I do understand inflation, what I don't understand is why , if a government was to stop borrowing money at interest and start printing its own money (interest free), how would that be inflationary?

And from what I understand, if a government borrows money at interest, let's just say $100. The money is "created" by the private bank and interest is charged on that $100 (let's say at 5%). So the government now has $100, but it owes $105 back to the bank, $5 of which does not exist yet. The government then spends the $100 on whatever it needed the money for in the first place. So in order for the government to pay back the principle and interest it must borrow another $105 on top of the original $100. The government now owes the banks $210.25 ($105 + $105.25) and only $205 of money exists to pay that debt off. So then the government borrows $210.25 to pay that debt off...and so on...and so on...
So to me it would appear that a system that requires the government to borrow money at interest is in fact inflationary as it causes an endless cycle of needlessly creating money. What I don't understand is why many economists and politicians state that if the government were to stop borrowing the money from private banks, and start creating the money internally without interest (because why would you charge yourself interest), that this would some how cause an inflationary effect?
Does that clarify my question?

Because the more you put in the system, the less valuable it is. Simple as that.
Khaos_Mage
Posts: 23,214
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2/13/2014 10:11:57 AM
Posted: 2 years ago
Inflation has always been described to me as "too many dollars chasing too few goods", so by borrowing the money from other countries, we could eliminate the money supply by simply giving the money back, essentially destroying it as far as the dollar is concerned.

However, if we just print the money, then the money is out there, and would have to be literally destroyed to eliminate the money supply, plus government has to get their hands on it for this express purpose.

Since the latter is less likely to happen, it seems that inflation would be more likely under a printing press than borrowing from another country.
My work here is, finally, done.
DanT
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2/13/2014 11:00:47 AM
Posted: 2 years ago
At 2/12/2014 9:47:19 AM, B0NEDUDE wrote:
DanT "When the government increases the monetary supply through reserves at a central bank, they simply increase the monetary base without causing inflation, and fractional banking by the commercial banks cause the monetary supply to grow due to the larger excess reserves, thereby creating inflation.

When the government increases the monetary supply through printing and coining more cash, they directly impact the monetary supply, thereby directly causing inflation."

Ok, I see what your are doing. It is a straw man & red herring argument.

First, you are comparing TWO seperate things: Printing money & issuing money.

Second, you use a double-standard when showing the Gov. issuing money vs. the fed res. which both increase the money supply when ISSUED.

Increasing reserves does not increase the monetary supply. It does how ever increase excess reserves, which allows commercial banks to increase deposits through fractional banking, thereby increasing the monetary supply (cash + deposits).
The fact that the Gov doesnt save a dollor for every dollar is IRRELEVANT so long as they have the needed SUPPLIES to physically MAKE the money (Which is debt free & transparent in its spending).

Hopefully this will be the final nail in that coffin...
Again, not what I said.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Apparelled
Posts: 19
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2/13/2014 6:37:31 PM
Posted: 2 years ago
If you actually read what I said, it would make sense. I already explained what I meant by "monetary base", yet you seem to think that I am talking about commodity money.

When the government increases the monetary supply through reserves at a central bank, they simply increase the monetary base without causing inflation, and fractional banking by the commercial banks cause the monetary supply to grow due to the larger excess reserves, thereby creating inflation.

When the government increases the monetary supply through printing and coining more cash, they directly impact the monetary supply, thereby directly causing inflation.

Ok I can see this is getting out of hand. I am not arguing for one system or another. I am only trying to understand something that I do not fully comprehend yet. I also would like to clarify that I up until now have been talking mostly about non-paper money. As in electronically transferred cash
I have more questions now

I still do not understand how the fed releasing paper money into circulation is not considered inflationary; as apposed to the us treasury doing the same thing, which is considered inflationary (as the us treasury holds reserves as well).

Does the fed release only paper money (and specie), or does it also release electronic funds? And if that is the case I repeat the first question slightly different. How is it that the fed releasing electronic funds into circulation is not inflationary as apposed to the us treasury doing the same thing(inflationary)?

How is it that the fed can use federal reserve bank notes to guarantee the bank notes in circulation? (As the gold standard is not used anymore, and fed notes are the lawful money that fed bank notes can be exchanged for). I do not understand as it is only guaranteeing for itself?

How does the fed charging interest on this money benefit the economy? As well, if the fed was to not charge interest on this money how would it be detriment the economy.

How much worth does the fed currently hold in reserve? And how much is the national debt compared to the current reserves. ( I've tried to find this info, and because I'm not an accountant I find it difficult to understand the jargon)

Does the fed have any liabilities owed to private interests? I am aware of the 6% dividend that they owe to non voting shareholders, as well as the loans they provide other banks. I mean does someone make profit by investing in the fed?

Does the fed invest in shares/stock in private corporations?

If the fed returns all excess profits to the treasury, what does the treasury do with that money?

Are you an economist (DanT)?

Thank you. Something's are more understandable to me since starting this forum, like the fact that the fed returns all excess profits to the us treasury. Something that I was not aware of before. I'm still not sure I believe in debt money though, it seems to be intentionally over complicated.
B0NEDUDE
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2/13/2014 8:49:09 PM
Posted: 2 years ago
DanT said:

"Increasing reserves does not increase the monetary supply. It does how ever increase excess reserves, which allows commercial banks to increase deposits through fractional banking, thereby increasing the monetary supply (cash + deposits)."

Which I would like to add: "Which would cause inflation when issued just like the treasury department."

This according to YOUR logic so far.

See this guy is just an apologist for these banking criminals.
DanT
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2/14/2014 12:06:23 PM
Posted: 2 years ago
At 2/13/2014 8:49:09 PM, B0NEDUDE wrote:
DanT said:

"Increasing reserves does not increase the monetary supply. It does how ever increase excess reserves, which allows commercial banks to increase deposits through fractional banking, thereby increasing the monetary supply (cash + deposits)."

Which I would like to add: "Which would cause inflation when issued just like the treasury department."

Printing more cash directly causes inflation, while increasing reserves indirectly causes inflation. That would be like saying international trade caused the black plague, when really it was diseased rats who stowawayed on the trading ship.

This according to YOUR logic so far.

See this guy is just an apologist for these banking criminals.
How are banks criminals? What laws did they break?
"Chemical weapons are no different than any other types of weapons."~Lordknukle
DanT
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2/14/2014 1:18:46 PM
Posted: 2 years ago
At 2/13/2014 6:37:31 PM, Apparelled wrote:

Ok I can see this is getting out of hand. I am not arguing for one system or another. I am only trying to understand something that I do not fully comprehend yet. I also would like to clarify that I up until now have been talking mostly about non-paper money. As in electronically transferred cash


EFT drafts such as debit cards and checks are considered deposits not cash. That is an entirely different story. If we eliminate cash, and then set up an automated system to increase or decrease people's transactional accounts proportional to the frequency of EFT drafts, we could eliminate inflation, because the monetary supply would be comprised solely of deposits proportional to the volume of transactions.

I have more questions now

I still do not understand how the fed releasing paper money into circulation is not considered inflationary; as apposed to the us treasury doing the same thing, which is considered inflationary (as the us treasury holds reserves as well).

The Treasury department prints cash (paper money and coins) and the FED puts it into circulation by sending it to commercial banks when the old cash is exchanged for new cash. When the cash is increased both the monetary base and monetary supply is directly increased, thereby increasing inflation.

When the FED buys securities, the Treasury department does not print cash, the FED simply credits the Government's account, hence increasing the Reserves. When the reserves are increased only the monetary base is increased, until fractional reserve banking increases the monetary supply.

Thus printing or coining more cash directly causes inflation, while increasing reserves indirectly causes inflation.

Reserves are transactional accounts within the central bank and deposits are transactional accounts within commercial banks.

Does the fed release only paper money (and specie), or does it also release electronic funds? And if that is the case I repeat the first question slightly different. How is it that the fed releasing electronic funds into circulation is not inflationary as apposed to the us treasury doing the same thing(inflationary)?

When the treasury department prints money, the FED releases the newly printed money either when exchanging old bills for news bills (whereby the old bills are then destroyed), or when lending money to commercial banks.
The FED serves as both the lender of last resort and the personal bank of the US government.

As for increasing transactional accounts, the FED increases transactional accounts within the central bank by crediting the government's account when buying securities; that is why the reserves are increased. It is commercial banks who increase transactional accounts that count towards the monetary supply, when they use fractional reserve banking. By law fractional reserve banking is limited to the supply of reserves, which is why increasing reserves can cause an increase ind deposits.

How is it that the fed can use federal reserve bank notes to guarantee the bank notes in circulation? (As the gold standard is not used anymore, and fed notes are the lawful money that fed bank notes can be exchanged for). I do not understand as it is only guaranteeing for itself?

There are two types of money; fiat money and commodity money. Commodity money has a fixed exchange rate to some form of commodity; whether it be gold, silver, or wampum shells. Fiat money has a floating exchange rate, so the currency is not limited to a commodity.

Money serves as a medium of exchange, so that we won't have to barter with commodities in exchange for other commodities. As such, money represents a share of the total economy. Take for example the mining towns back during the free banking era, which use to issue their own currency. That currency represented a share of the company's profit, and could be used to buy anything within the company store or from the company itself. In effect the miners were paid in store credit. Now imagine other companies accepted the store credit; the worth of the credit would increase, as it could be used to buy a greater variety of goods. That is what a national currency is; it is store credit for the national economy.

The problem with the commodity standard is that there is never enough of a commodity to back the entire economy. A commodity would have to comprise 50% of the entire economy, and than be kept in reserves in order to make the commodity standard effective.

For example, originally we had a silver standard, based on the Spanish milled dollar. Because there was not enough silver we allowed for a floating exchange between gold and silver. Because gold and silver's exchange fluctuated we than had to fix the exchange between gold and silver. After the gold rush we eliminated the use of silver, and had a quasi gold standard. Under the Brenton woods system, foreign currencies were than set with a fixed exchange rate to the US dollar, which was set at a fixed exchange rate to gold, thereby creating an actual gold standard. We were taken off the gold standard, because there was not enough gold to support the global economy, and we were faced with an economic collapse. Now we have fiat currency, which is backed by the economy rather than by a specific commodity.

How does the fed charging interest on this money benefit the economy? As well, if the fed was to not charge interest on this money how would it be detriment the economy.

Again, the FED is nonprofit; all profits go directly to the Treasury Department. As far as being good or bad for the economy, that is completely circumstantial.

How much worth does the fed currently hold in reserve? And how much is the national debt compared to the current reserves. ( I've tried to find this info, and because I'm not an accountant I find it difficult to understand the jargon)

As of 02/12/2014, the US government owes $12,281,806,028,142.75 to the public (individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government) and $4,976,976,244,122.44 in Intragovernmental holdings (Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities). In total the government owes $17,258,782,272,265.19.

The US monetary base (cash + reserves) = $3,734 billion; only ~25% of which is Cash.

Does the fed have any liabilities owed to private interests? I am aware of the 6% dividend that they owe to non voting shareholders, as well as the loans they provide other banks. I mean does someone make profit by investing in the fed?

The FED is a self-funding non-profit corporation serving as an independent entity within government; similar to the postal service.
Does the fed invest in shares/stock in private corporations?

Not unless it is on behalf the the US government; again it is a non-profit organization.
If the fed returns all excess profits to the treasury, what does the treasury do with that money?

Spends it on the federal budget.
Are you an economist (DanT)?

I majored in business with a minor in finance and economics. I received a 100% in principals of economics, a 97% in international economics, and a 100% in the economics of money and banking.
Thank you. Something's are more understandable to me since starting this forum, like the fact that the fed returns all excess profits to the us treasury. Something that I was not aware of before. I'm still not sure I believe in debt money though, it seems to be intentionally over complicated.
Your welcome.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
twocupcakes
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2/14/2014 2:08:25 PM
Posted: 2 years ago
At 2/13/2014 10:11:57 AM, Khaos_Mage wrote:
Inflation has always been described to me as "too many dollars chasing too few goods", so by borrowing the money from other countries, we could eliminate the money supply by simply giving the money back, essentially destroying it as far as the dollar is concerned.

However, if we just print the money, then the money is out there, and would have to be literally destroyed to eliminate the money supply, plus government has to get their hands on it for this express purpose.

Since the latter is less likely to happen, it seems that inflation would be more likely under a printing press than borrowing from another country.

The Central bank can always decrease the money supply if they want. They just borrow money from the commercial banks, and thus decrease the money supply.
B0NEDUDE
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2/14/2014 8:26:13 PM
Posted: 2 years ago
Ok, this conversation has gone officially full-retard and it is plain stupid to argue with people who litterally go around in circles with nothing to show for.
wrichcirw
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2/15/2014 6:59:08 PM
Posted: 2 years ago
At 2/14/2014 1:18:46 PM, DanT wrote:
At 2/13/2014 6:37:31 PM, Apparelled wrote:

How is it that the fed can use federal reserve bank notes to guarantee the bank notes in circulation? (As the gold standard is not used anymore, and fed notes are the lawful money that fed bank notes can be exchanged for). I do not understand as it is only guaranteeing for itself?

There are two types of money; fiat money and commodity money. Commodity money has a fixed exchange rate to some form of commodity; whether it be gold, silver, or wampum shells. Fiat money has a floating exchange rate, so the currency is not limited to a commodity.

Money serves as a medium of exchange, so that we won't have to barter with commodities in exchange for other commodities. As such, money represents a share of the total economy. Take for example the mining towns back during the free banking era, which use to issue their own currency. That currency represented a share of the company's profit, and could be used to buy anything within the company store or from the company itself. In effect the miners were paid in store credit. Now imagine other companies accepted the store credit; the worth of the credit would increase, as it could be used to buy a greater variety of goods. That is what a national currency is; it is store credit for the national economy.

The problem with the commodity standard is that there is never enough of a commodity to back the entire economy. A commodity would have to comprise 50% of the entire economy, and than be kept in reserves in order to make the commodity standard effective.

For example, originally we had a silver standard, based on the Spanish milled dollar. Because there was not enough silver we allowed for a floating exchange between gold and silver. Because gold and silver's exchange fluctuated we than had to fix the exchange between gold and silver. After the gold rush we eliminated the use of silver, and had a quasi gold standard. Under the Brenton woods system, foreign currencies were than set with a fixed exchange rate to the US dollar, which was set at a fixed exchange rate to gold, thereby creating an actual gold standard. We were taken off the gold standard, because there was not enough gold to support the global economy, and we were faced with an economic collapse. Now we have fiat currency, which is backed by the economy rather than by a specific commodity.

I found most of this post agreeable except for this portion.

1) "Never enough" is the perennial problem in economics in general, as economics is essentially the study of what to do in a world of scarcity.
2) There's "never enough" of money in general, whether or not that money is in commodity form or fiat.
3) If there is a lot of demand for a commodity, then the value of that commodity will increase. The problem with this happening to a commodity money is that such value increase of money is deflationary, which discourages debt creation, which discourages economic activity in an FRB system. This is my understanding as to why the Fed has been increasing reserves since 2008...to prevent deflation from taking hold. The Fed can do this because we do not have a commodity-based monetary system.

Basically, the Fed will risk dramatic inflation in order to prevent deflation. Both in the end will probably have the same effect of discouraging economic activity, inflation being a "stealth tax" method of paying down the national debt.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
DanT
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2/15/2014 10:56:43 PM
Posted: 2 years ago
At 2/15/2014 6:59:08 PM, wrichcirw wrote:
At 2/14/2014 1:18:46 PM, DanT wrote:
At 2/13/2014 6:37:31 PM, Apparelled wrote:

How is it that the fed can use federal reserve bank notes to guarantee the bank notes in circulation? (As the gold standard is not used anymore, and fed notes are the lawful money that fed bank notes can be exchanged for). I do not understand as it is only guaranteeing for itself?

There are two types of money; fiat money and commodity money. Commodity money has a fixed exchange rate to some form of commodity; whether it be gold, silver, or wampum shells. Fiat money has a floating exchange rate, so the currency is not limited to a commodity.

Money serves as a medium of exchange, so that we won't have to barter with commodities in exchange for other commodities. As such, money represents a share of the total economy. Take for example the mining towns back during the free banking era, which use to issue their own currency. That currency represented a share of the company's profit, and could be used to buy anything within the company store or from the company itself. In effect the miners were paid in store credit. Now imagine other companies accepted the store credit; the worth of the credit would increase, as it could be used to buy a greater variety of goods. That is what a national currency is; it is store credit for the national economy.

The problem with the commodity standard is that there is never enough of a commodity to back the entire economy. A commodity would have to comprise 50% of the entire economy, and than be kept in reserves in order to make the commodity standard effective.

For example, originally we had a silver standard, based on the Spanish milled dollar. Because there was not enough silver we allowed for a floating exchange between gold and silver. Because gold and silver's exchange fluctuated we than had to fix the exchange between gold and silver. After the gold rush we eliminated the use of silver, and had a quasi gold standard. Under the Brenton woods system, foreign currencies were than set with a fixed exchange rate to the US dollar, which was set at a fixed exchange rate to gold, thereby creating an actual gold standard. We were taken off the gold standard, because there was not enough gold to support the global economy, and we were faced with an economic collapse. Now we have fiat currency, which is backed by the economy rather than by a specific commodity.

I found most of this post agreeable except for this portion.

1) "Never enough" is the perennial problem in economics in general, as economics is essentially the study of what to do in a world of scarcity.

In regards to fixed exchanges, the scarcity of the standard commodity would place a cap on the entire economy. The solution is to create a floating exchange aka fiat money.

2) There's "never enough" of money in general, whether or not that money is in commodity form or fiat.
With fiat money we control how much money is in circulation, with a commodity standard the monetary supply is limited to the supply of that commodity.
3) If there is a lot of demand for a commodity, then the value of that commodity will increase. The problem with this happening to a commodity money is that such value increase of money is deflationary, which discourages debt creation, which discourages economic activity in an FRB system. This is my understanding as to why the Fed has been increasing reserves since 2008...to prevent deflation from taking hold. The Fed can do this because we do not have a commodity-based monetary system.

A commodity standard does not fix the supply of money to the nominal supply of the standard commodity, it fixes it to the real supply of the standard commodity. Therefore the value of the commodity is irrelevant to the supply of money.
If you are trying to say that the standard commodity's nominal supply can be equivalent to 50% of the entire economy's nominal output, I can't think of a single commodity that would match that hypothetical scenario. If you know a commodity with a nominal supply equivalent to all other combined nominal goods and services within the economy, please let me know which commodity you have in mind.

Basically, the Fed will risk dramatic inflation in order to prevent deflation. Both in the end will probably have the same effect of discouraging economic activity, inflation being a "stealth tax" method of paying down the national debt.

Inflation and Deflation has to do with the rate of growth of the monetary supply.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
wrichcirw
Posts: 11,196
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2/16/2014 3:34:30 AM
Posted: 2 years ago
At 2/15/2014 10:56:43 PM, DanT wrote:
At 2/15/2014 6:59:08 PM, wrichcirw wrote:
At 2/14/2014 1:18:46 PM, DanT wrote:
At 2/13/2014 6:37:31 PM, Apparelled wrote:

How is it that the fed can use federal reserve bank notes to guarantee the bank notes in circulation? (As the gold standard is not used anymore, and fed notes are the lawful money that fed bank notes can be exchanged for). I do not understand as it is only guaranteeing for itself?

There are two types of money; fiat money and commodity money. Commodity money has a fixed exchange rate to some form of commodity; whether it be gold, silver, or wampum shells. Fiat money has a floating exchange rate, so the currency is not limited to a commodity.

Money serves as a medium of exchange, so that we won't have to barter with commodities in exchange for other commodities. As such, money represents a share of the total economy. Take for example the mining towns back during the free banking era, which use to issue their own currency. That currency represented a share of the company's profit, and could be used to buy anything within the company store or from the company itself. In effect the miners were paid in store credit. Now imagine other companies accepted the store credit; the worth of the credit would increase, as it could be used to buy a greater variety of goods. That is what a national currency is; it is store credit for the national economy.

The problem with the commodity standard is that there is never enough of a commodity to back the entire economy. A commodity would have to comprise 50% of the entire economy, and than be kept in reserves in order to make the commodity standard effective.

For example, originally we had a silver standard, based on the Spanish milled dollar. Because there was not enough silver we allowed for a floating exchange between gold and silver. Because gold and silver's exchange fluctuated we than had to fix the exchange between gold and silver. After the gold rush we eliminated the use of silver, and had a quasi gold standard. Under the Brenton woods system, foreign currencies were than set with a fixed exchange rate to the US dollar, which was set at a fixed exchange rate to gold, thereby creating an actual gold standard. We were taken off the gold standard, because there was not enough gold to support the global economy, and we were faced with an economic collapse. Now we have fiat currency, which is backed by the economy rather than by a specific commodity.

I found most of this post agreeable except for this portion.

1) "Never enough" is the perennial problem in economics in general, as economics is essentially the study of what to do in a world of scarcity.

In regards to fixed exchanges, the scarcity of the standard commodity would place a cap on the entire economy. The solution is to create a floating exchange aka fiat money.

You can create a floating exchange based off of a commodity. I mean, we have currency markets today on fiat money...this isn't a point against adding gold or another commodity into such a system.

The main problem with a commodity money system is that governments would find it extremely difficult to print their way out of a bad situation since there would be a universal standard, i.e. the floating rate of gold on international markets. To stem off deflation due to a collapse in debt demand, instead of printing, a government would have to go out of its way to buy gold off international markets, which without debt would probably entail selling assets such as land/territory. Either that, or war.

2) There's "never enough" of money in general, whether or not that money is in commodity form or fiat.
With fiat money we control how much money is in circulation, with a commodity standard the monetary supply is limited to the supply of that commodity.

Agree, although this doesn't refute my #2, but merely adds context to it.

3) If there is a lot of demand for a commodity, then the value of that commodity will increase. The problem with this happening to a commodity money is that such value increase of money is deflationary, which discourages debt creation, which discourages economic activity in an FRB system. This is my understanding as to why the Fed has been increasing reserves since 2008...to prevent deflation from taking hold. The Fed can do this because we do not have a commodity-based monetary system.

A commodity standard does not fix the supply of money to the nominal supply of the standard commodity, it fixes it to the real supply of the standard commodity. Therefore the value of the commodity is irrelevant to the supply of money.

The value of the commodity, if that commodity were to be money, is quite relevant to the supply of money, as the higher the value, the more producers would seek to increase supply of it.

If you are trying to say that the standard commodity's nominal supply can be equivalent to 50% of the entire economy's nominal output, I can't think of a single commodity that would match that hypothetical scenario. If you know a commodity with a nominal supply equivalent to all other combined nominal goods and services within the economy, please let me know which commodity you have in mind.

I don't know the relevance of your 50% number, and don't see any reason to consider your hypothetical.

As it is, the value of gold can increase or decrease to make it worth as much or as little as it needs to be via market action...this is how fiat works already via floating exchange/interest rates.

A commodity system would hold governments accountable for profligacy, with the risk of ceding assets if it were to become bankrupt enough to require money printing under fiat. All this really does is to further corporatize world governments, with land/territory being a type of "market share" of world citizenry.

Basically, the Fed will risk dramatic inflation in order to prevent deflation. Both in the end will probably have the same effect of discouraging economic activity, inflation being a "stealth tax" method of paying down the national debt.

Inflation and Deflation has to do with the rate of growth of the monetary supply.

Inflation and deflation deal with price levels, not just monetary supply. Inflation becomes a "stealth tax" because when nominal prices rise, the nominal price of debt contracts already in circulation typically do not rise, which decreases the value of debt, which is essentially another way to pay it down.

The idea is that if you borrowed one gold bar (let's take interest out of the equation to simply) with the understanding that it would take one year's worth of labor to repay that principle, but in the future it actually took two years to pay off that principle, that's deflation. That discourages debt creation...no one would borrow on those kind of terms.

Instead, we have benign inflation, where every year principle naturally decreases a very little bit in value. This encourages debt creation.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
DanT
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2/16/2014 11:31:54 AM
Posted: 2 years ago
At 2/16/2014 3:34:30 AM, wrichcirw wrote:
At 2/15/2014 10:56:43 PM, DanT wrote:
In regards to fixed exchanges, the scarcity of the standard commodity would place a cap on the entire economy. The solution is to create a floating exchange aka fiat money.

You can create a floating exchange based off of a commodity.
Than it would not be a commodity standard.
I mean, we have currency markets today on fiat money...this isn't a point against adding gold or another commodity into such a system.

It is still fiat money. If you are talking about establishing gold backed fiat money, whereby a fiat currency can only be exchanged for a standard commodity at a floating rate, such a system would be worse than both the current system and the commodity standard; instead of being backed by the entire economy the fiat currency would be backed by a single commodity, the supply of which would grow at a different pace than the economy, resulting in wildly unpredictable inflation rates.
The main problem with a commodity money system is that governments would find it extremely difficult to print their way out of a bad situation since there would be a universal standard, i.e. the floating rate of gold on international markets.
Again if there is a floating exchange it is not a commodity standard. A commodity standard is where one trades in a commodity either directly or indirectly using a fixed exchange. What you are proposing is a commodity backed fiat currency, in which case the government could print all they wanted, but the currency would inflate at a faster rate.

To stem off deflation due to a collapse in debt demand, instead of printing, a government would have to go out of its way to buy gold off international markets, which without debt would probably entail selling assets such as land/territory. Either that, or war.

Or they would have to exchange bonds for gold, which is no different than exchanging bonds for reserves at the FED, other than the limited supply of gold in the world.
2) There's "never enough" of money in general, whether or not that money is in commodity form or fiat.
With fiat money we control how much money is in circulation, with a commodity standard the monetary supply is limited to the supply of that commodity.

Agree, although this doesn't refute my #2, but merely adds context to it.

A commodity standard does not fix the supply of money to the nominal supply of the standard commodity, it fixes it to the real supply of the standard commodity. Therefore the value of the commodity is irrelevant to the supply of money.

The value of the commodity, if that commodity were to be money, is quite relevant to the supply of money, as the higher the value, the more producers would seek to increase supply of it.

Supply has nothing to do with the value, it has to do with the profit and opportunity cost. Let's say a supplier buys in bulk from a manufacturer (buying in bulk units decreases the value, because less people are willing to purchase a bulk unit), and then sells each individual unit. Let's say a bulk unit = 100 individual units, and the supplier purchased each bulk unit for $100 and sold each individual unit for $3. The value of 100 individual units is $300, and the profit is $200. Now let's say the supplier could only sell each unit for $1 each; the value of 100 individual units is $100, and the profit is $0. Therefore there is no reason for the supplier to sell the individual units, as it is a waste of time and the opportunity cost is greater than alternative goods. If a supplier can make $3/unit selling good A, and $5/unit selling good B, than the supplier will sell good B over good A due to the opportunity cost .

If you are trying to say that the standard commodity's nominal supply can be equivalent to 50% of the entire economy's nominal output, I can't think of a single commodity that would match that hypothetical scenario. If you know a commodity with a nominal supply equivalent to all other combined nominal goods and services within the economy, please let me know which commodity you have in mind.

I don't know the relevance of your 50% number, and don't see any reason to consider your hypothetical.

If a standard commodity comprises 50% of the economy, than it is equal to the rest of the economy, because 50% = 100% - 50%. The the commodity standard comprises less than 50% of the economy, say 10%, than the economy cannot meet its potential.

As it is, the value of gold can increase or decrease to make it worth as much or as little as it needs to be via market action...this is how fiat works already via floating exchange/interest rates.

How fiat works, not how a commodity standard works. The supply of gold is limited to its production and natural abundancey.

I have to be heading out the door, but I'll finish my response later.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
wrichcirw
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2/16/2014 2:12:01 PM
Posted: 2 years ago
At 2/16/2014 11:31:54 AM, DanT wrote:
At 2/16/2014 3:34:30 AM, wrichcirw wrote:
At 2/15/2014 10:56:43 PM, DanT wrote:
In regards to fixed exchanges, the scarcity of the standard commodity would place a cap on the entire economy. The solution is to create a floating exchange aka fiat money.

You can create a floating exchange based off of a commodity.
Than it would not be a commodity standard.

It still would be. Currencies have floating exchanges, commodities have floating exchanges.

I mean, we have currency markets today on fiat money...this isn't a point against adding gold or another commodity into such a system.

It is still fiat money. If you are talking about establishing gold backed fiat money, whereby a fiat currency can only be exchanged for a standard commodity at a floating rate, such a system would be worse than both the current system and the commodity standard; instead of being backed by the entire economy the fiat currency would be backed by a single commodity, the supply of which would grow at a different pace than the economy, resulting in wildly unpredictable inflation rates.

1) A gold standard will still utilize dollars. The dollars will be tied to the value of a commodity, as opposed to nothing other than the backing of the federal government.

2) Supply of money will be affected by the profitability of accumulating that commodity.

3) Agree that such a tying of a commodity to money has drawbacks as you have stipulated.

The main problem with a commodity money system is that governments would find it extremely difficult to print their way out of a bad situation since there would be a universal standard, i.e. the floating rate of gold on international markets.
Again if there is a floating exchange it is not a commodity standard. A commodity standard is where one trades in a commodity either directly or indirectly using a fixed exchange. What you are proposing is a commodity backed fiat currency, in which case the government could print all they wanted, but the currency would inflate at a faster rate.

Commodities are traded on unfixed markets today. You're adding in an additional qualifier that all commodity trading must be based upon fixed pricing, which is simply not how the commodity markets work. It is a defining feature of the historical gold standard, but need not be a defining feature of a gold standard going forward.

To stem off deflation due to a collapse in debt demand, instead of printing, a government would have to go out of its way to buy gold off international markets, which without debt would probably entail selling assets such as land/territory. Either that, or war.

Or they would have to exchange bonds for gold, which is no different than exchanging bonds for reserves at the FED, other than the limited supply of gold in the world.

No, the stipulation is a collapse in debt demand, meaning that bonds are not possible in such a scenario. This is what the OP was citing.

2) There's "never enough" of money in general, whether or not that money is in commodity form or fiat.
With fiat money we control how much money is in circulation, with a commodity standard the monetary supply is limited to the supply of that commodity.

Agree, although this doesn't refute my #2, but merely adds context to it.

A commodity standard does not fix the supply of money to the nominal supply of the standard commodity, it fixes it to the real supply of the standard commodity. Therefore the value of the commodity is irrelevant to the supply of money.

The value of the commodity, if that commodity were to be money, is quite relevant to the supply of money, as the higher the value, the more producers would seek to increase supply of it.

Supply has nothing to do with the value,

Supply has everything to do with value. It is one half of the equation as to how to reach a "price", the other half being demand. That price is the value of whatever is being traded has at the moment. It may be different from what you may value it, or what I may value it, but the market accounts for all such individual perspectives to reach the price at which the market values it at.

...it has to do with the profit and opportunity cost. Let's say a supplier buys in bulk from a manufacturer (buying in bulk units decreases the value, because less people are willing to purchase a bulk unit)

Here you have cited less demand, i.e. the other side of the value equation.

...and then sells each individual unit. Let's say a bulk unit = 100 individual units, and the supplier purchased each bulk unit for $100 and sold each individual unit for $3. The value of 100 individual units is $300, and the profit is $200. Now let's say the supplier could only sell each unit for $1 each; the value of 100 individual units is $100, and the profit is $0. Therefore there is no reason for the supplier to sell the individual units, as it is a waste of time and the opportunity cost is greater than alternative goods. If a supplier can make $3/unit selling good A, and $5/unit selling good B, than the supplier will sell good B over good A due to the opportunity cost .

This example doesn't make any sense. It does not convey any useful information. There is no lesson to learn from your example, nor is there an evident point you are making.

1) "There is no evident lesson learned" about selling in bulk vs selling individually
2) "..." about the consequences of lowering prices
3) "..." about profit vs revenue.

If you are trying to say that the standard commodity's nominal supply can be equivalent to 50% of the entire economy's nominal output, I can't think of a single commodity that would match that hypothetical scenario. If you know a commodity with a nominal supply equivalent to all other combined nominal goods and services within the economy, please let me know which commodity you have in mind.

I don't know the relevance of your 50% number, and don't see any reason to consider your hypothetical.

If a standard commodity comprises 50% of the economy, than it is equal to the rest of the economy, because 50% = 100% - 50%. The the commodity standard comprises less than 50% of the economy, say 10%, than the economy cannot meet its potential.

That's not how it works. I really have no idea where you are coming up with your interpretation of this "money + underlying assets = economy" equation...what you seem to be saying is that 1+1=1. The real equation is 1=1=1, i.e. the commodity represents the value of the underlying assets, which represents the market capitalization of the economy...without those assets, the commodity itself would hold little value. Fiat by comparison would be wholly worthless if it did not represent the worth of the assets held in the government's name, i.e. territory, technology, etc.

As it is, the value of gold can increase or decrease to make it worth as much or as little as it needs to be via market action...this is how fiat works already via floating exchange/interest rates.

How fiat works, not how a commodity standard works. The supply of gold is limited to its production and natural abundancey.

True enough, but this is a drawback of a commodity standard, and not its defining feature. There's no reason why a commodity standard would somehow cease to operate as the commodity currently operates in the marketplace.

Any attempt by a government to peg the price would probably fail given a global marketplace, if that's what you're getting at.

I have to be heading out the door, but I'll finish my response later.
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
DanT
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2/17/2014 7:48:19 AM
Posted: 2 years ago
At 2/16/2014 2:12:01 PM, wrichcirw wrote:
At 2/16/2014 11:31:54 AM, DanT wrote:
Than it would not be a commodity standard.

It still would be. Currencies have floating exchanges, commodities have floating exchanges.

Currencies have floating exchanges with other currencies due to the fact they are no longer pegged to a commodity standard. If $1 = X oz of silver, and "1 = Y oz of silver, the exchange rate of $/" would be pegged at X/Y. Remove the requirement to be backed by a commodity and the exchange rate floats.

It is still fiat money. If you are talking about establishing gold backed fiat money, whereby a fiat currency can only be exchanged for a standard commodity at a floating rate, such a system would be worse than both the current system and the commodity standard; instead of being backed by the entire economy the fiat currency would be backed by a single commodity, the supply of which would grow at a different pace than the economy, resulting in wildly unpredictable inflation rates.

1) A gold standard will still utilize dollars. The dollars will be tied to the value of a commodity, as opposed to nothing other than the backing of the federal government.

Hence a fixed exchange between money and a standard commodity.
2) Supply of money will be affected by the profitability of accumulating that commodity.

which is not reflective of the rest of the economy

Commodities are traded on unfixed markets today. You're adding in an additional qualifier that all commodity trading must be based upon fixed pricing, which is simply not how the commodity markets work.
It is a defining feature of the historical gold standard, but need not be a defining feature of a gold standard going forward.

Not what I said. I didn't say the exchange between commodity A and B would be fixed, I said the exchange between the standard commodity and Money would be fixed. It is a requirement of the gold standard; without which you cannot have a commodity standard.

Or they would have to exchange bonds for gold, which is no different than exchanging bonds for reserves at the FED, other than the limited supply of gold in the world.

No, the stipulation is a collapse in debt demand, meaning that bonds are not possible in such a scenario. This is what the OP was citing.

This is irrelevant to the point, because the creation of reserves works the same way whether it is a gold or fiat standard; if bonds are not an option they still have the same alternatives.

Supply has nothing to do with the value,

Supply has everything to do with value. It is one half of the equation as to how to reach a "price", the other half being demand. That price is the value of whatever is being traded has at the moment. It may be different from what you may value it, or what I may value it, but the market accounts for all such individual perspectives to reach the price at which the market values it at.

The price of money is the interest rate. The supply of money is inelastic. When the demand for money ie nominal transactions per velocity increases the inelastic supply must increase proportionally otherwise there will be inflation or deflation. The monetary supply is most efficient when the interest rate is at or near 0%.

The monetary supply under a gold standard is tied to the supply gold, regardless of the price of gold. When there is not enough gold to meet the monetary demand, the interest rates rise causing deflation.

...it has to do with the profit and opportunity cost. Let's say a supplier buys in bulk from a manufacturer (buying in bulk units decreases the value, because less people are willing to purchase a bulk unit)

Here you have cited less demand, i.e. the other side of the value equation.

Point? Your train of thought is very scattered.
...and then sells each individual unit. Let's say a bulk unit = 100 individual units, and the supplier purchased each bulk unit for $100 and sold each individual unit for $3. The value of 100 individual units is $300, and the profit is $200. Now let's say the supplier could only sell each unit for $1 each; the value of 100 individual units is $100, and the profit is $0. Therefore there is no reason for the supplier to sell the individual units, as it is a waste of time and the opportunity cost is greater than alternative goods. If a supplier can make $3/unit selling good A, and $5/unit selling good B, than the supplier will sell good B over good A due to the opportunity cost .

This example doesn't make any sense. It does not convey any useful information. There is no lesson to learn from your example, nor is there an evident point you are making.

1) "There is no evident lesson learned" about selling in bulk vs selling individually
2) "..." about the consequences of lowering prices
3) "..." about profit vs revenue.

The point is that the supply is not determined by the price, it is determined by the profit. The price is the result of supply and demand, and the supply and demand is determined by the utility of selling and buying these goods. The utility for the supplier is the profitability and the utility of the buyer is what ever benefit they gain from possessing such goods or services.

If a standard commodity comprises 50% of the economy, than it is equal to the rest of the economy, because 50% = 100% - 50%. The the commodity standard comprises less than 50% of the economy, say 10%, than the economy cannot meet its potential.

That's not how it works. I really have no idea where you are coming up with your interpretation of this "money + underlying assets = economy" equation...
what you seem to be saying is that 1+1=1. The real equation is 1=1=1, i.e. the commodity represents the value of the underlying assets, which represents the market capitalization of the economy...without those assets, the commodity itself would hold little value. Fiat by comparison would be wholly worthless if it did not represent the worth of the assets held in the government's name, i.e. territory, technology, etc.

That is not what I said, but thanks for straw-manning me.
Money is simply a medium of exchange, and therefore there needs to be enough of it in order to facilitate transactions. When there is not enough money to facilitate the potential volume of transactions the result is an economic bust.

How fiat works, not how a commodity standard works. The supply of gold is limited to its production and natural abundancey.

True enough, but this is a drawback of a commodity standard, and not its defining feature. There's no reason why a commodity standard would somehow cease to operate as the commodity currently operates in the marketplace.

Any attempt by a government to peg the price would probably fail given a global marketplace, if that's what you're getting at.

So now you agree that under a commodity standard the supply of money is limited to the supply of that standard commodity?
"Chemical weapons are no different than any other types of weapons."~Lordknukle
DanT
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2/17/2014 8:08:05 AM
Posted: 2 years ago
At 2/16/2014 3:34:30 AM, wrichcirw wrote:
At 2/15/2014 10:56:43 PM, DanT wrote:

Inflation and Deflation has to do with the rate of growth of the monetary supply.

Inflation and deflation deal with price levels, not just monetary supply.

Inflation = the % change in Price = the % change in the monetary supply + the % change in the velocity of money - the % change in the volume of transactions.

Inflation becomes a "stealth tax" because when nominal prices rise, the nominal price of debt contracts already in circulation typically do not rise, which decreases the value of debt, which is essentially another way to pay it down.

The idea is that if you borrowed one gold bar (let's take interest out of the equation to simply)
You cannot talk about inflation without talking about the interest rate, because the two are connected. The interest rate decreases as inflation goes up, because the two are negatively correlated.
with the understanding that it would take one year's worth of labor to repay that principle, but in the future it actually took two years to pay off that principle, that's deflation. That discourages debt creation...no one would borrow on those kind of terms.

Instead, we have benign inflation, where every year principle naturally decreases a very little bit in value. This encourages debt creation.

In an ideal economy the interest rate should be the only thing discouraging lending and borrowing. High interest rates discourage borrowing and encourages lending, while low interest rates discourage lending and encourages borrowing. When interest rates are low there is little reason to borrow money, because there is already enough money. This natural balance helps regulate borrowing and lending, and helps discourage fiscal irresponsibility.

That being said; borrowing would be more ideal under a commodity standard, because of the lack of money, so the natural ability for said standard to discourage borrowing would be an argument against commodity standards.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
DanT
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2/17/2014 9:34:20 AM
Posted: 2 years ago
At 2/9/2014 9:10:36 PM, Apparelled wrote:
What I don't understand is why there is this belief that, if a government stops borrowing money from private banks (at interest), and starts creating its own money that is interest free, that it would somehow cause an uncontrolled inflationary effect.

Seriously I cannot find any evidence anywhere to prove this to be true. I can only find reasons why increasing the money supply would cause inflation, as seen in this video http://youtu.be.... But we currently employ the practice of increasing or decreasing the money supply in a debt based monetary system. So why would it fall apart in an interest free system.

So if someone can please clarify this in laymen's terms, I truly want to understand this. I am currently flooded with information on how debt free money will not cause inflation.

I have to get ready to leave, but here are some equations to help explain what the effects of eliminating reserves, cash, or deposits would have on inflation and the economy.

http://www.debate.org...

I will explain it more later, but I have to get ready to leave at the moment.
"Chemical weapons are no different than any other types of weapons."~Lordknukle