More misleading analysis purporting to say that the dollar has lost 95% of its value in the past 100 years.
| Let us take at the period from 1913-2006, where we have complete data. So what do they mean, when they say the dollar lost 95.1% of its value in those 93 years? Essentially, an average good/service that cost $1 in 2006, used to be priced at 4.9 cents in 1913. In other words, the average price level of goods/services increased by 1930% since 1913. True, but guess what, average earned income increased by 6560% during the same time period. Average earned income rose from $740/yr in 1913 to $49,300/yr in 2006. Adjusting for inflation, $740/yr in 1913 is $15,000/yr in 2006 dollars. Average incomes, not only kept pace, but beat price inflation by 230%. Read full article here.
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34 comments:
Nice. This should be sent to Kudlow, Forbes and the rest of the merry crew.
Yes, yes, but the purchasing power of mere wages and profits are beside the point for the hard-money crowd. Everyone knows that what matters to the health of the economy is the purchasing power of lazy money. If I am virtuous and stuff my pillow full of cash, I should be able to take it out and buy the same amount (or more, due to interest) of goods that I abstained from. Because saving is virtuous and should be rewarded.
What? This will break the productive economy, you say? Well, so what? Actually producing things is for the little people. So gauche. Every decent gentleman lives off fixed income securities. Adding value is for the common people.
- Jake
Plus, looks at all the neat stuff we have now that didn't even exist in 1913. It's like comparing apples to oranges.
Jake, about the only way to lose is to stuff cash under a mattress. Putting it out at compound interest would offset the declining purchasing power. So would purchasing assets. Only dummies would not be able to figure this out.
Well, technically the dollar has decreased in value over time. However, as you state ones ability to acquire more advanced goods and services over time has increased as real incomes have risen.
With that said, I know many people who store dollars as a way of financing future purchases. Unfortunately, they do not have the time or the will to learn finance to the point where they only use the currency for transactions.
So, as much as I want to agree with this idea wholeheartedly, those that are financially illiterate are at a disadvantage when it comes to finding adequate stores of wealth.
This is also why negative real rates of return on treasuries pose a threat considering one must sacrifice future purchasing power in order to hold a credit risk free asset.
I for one earn income that I cannot spend immediately and as a result I'm incentivized to seek out stores of value that will maximize my future purchasing power.
Now, a more productive and advanced future economy is more likely to supply me with the goods and services that I will desire at that point in time. Otherwise, I will have adequate financial assets, but a lack of consumer options to swap those assets for.
Shouldn't our goals be to maximize current and future standards of living by promoting inventiveness and production?
When thinking of the human race's potential as a whole, are we not made worse off when an increasing number of us are unproductive? This is why European Austerity in the face of a debt burdened private sector who lack the means to ever pay down their personal debts is foolish/ shortsighted policy seeing as it has resulted in mass unemployment.
Now, I am not in favor of the government directing ideal resources seeing as private debt restructuring and credit write-downs are still a viable option. This in itself should increase aggregate demand.
Yes, I did just go off on a tangent!
Thanks! [Fwiw: its Armo*, no N ;) ]
I am regular reader... Thanks for the shout out Mike & Armo Trader...
I have another post (part 2) looking at this from the savings perspective also.
http://realfactbias.blogspot.com/2012/04/myth-of-inflation-tax.html
I don't know why some Ron Paul supporters think that people hold most of their savings in cash.
Levy Institute did a study that looked at this from 1983-2007 (linked).
As expected, for those who do have savings, on average, their savings beat inflation over the 24 year period. As of 2007 the average American held just
6.6% in liquid assets.
And even those are mostly interest bearing. Non-interest bearing accounts/cash amount to somewhere between 0.4% and 6.6% of total assets (prob closer to 0.4%).
As expected, principal residences account for the biggest share of household wealth (32.8%)
@Tom Hickey & Rafael Barbieri: Well, Treasuries should have negative real interest rates.
The thing about paying interest on Treasuries is that it sets a floor on the risk-adjusted remuneration of productive investments. If I can get 3 % risk-free return on a T-bond, there is no way I will be buying a machine and going to all the trouble of making it work, getting someone to work it and disposing of the products in the open market unless it gives at least 3 % risk-adjusted return on investment.
But if I can make 2 % risk-adjusted return on the machine after all expenses have been paid, then (assuming even moderately efficient markets) investing in the machine will be a net gain for society. And in fact, since investment risk is partly distributional and only partly real, the individual investor will over-price risk relative to the social optimum (part of the risk the individual investor sees is the risk that someone else rather than himself will benefit from his investment - obviously this risk cancels out when you aggregate). So the risk-free real rate of interst should be negative, in order to ensure that all possible socially productive investments are made.
(The argument is further strengthened by the fact that individuals are typically more risk-averse than society as a whole can afford to be, because society is, collectively, holding the maximally diversified portfolio possible.)
The other point is that money is a token of political power, and people should not be permitted to indefinitely hoard tokens of political power. Indeed, the other commonly recognised token of political power - the ballot - cannot be saved up: It's use it or lose it. One can scarce imagine that people could "save up" their votes from one election to another (and even gain interest on them!), if they liked none of the candidates on offer in the current one.
- Jake
@JakeS
I agree with your understanding that the differential between the rate of return on a risk free asset is taken into consideration by some investors when compared to the rate of return a real investment may offer.
With that said, someone must hold treasuries at all times, regardless of whether or not alternative real investment opportunities exist. Those holders will receive a lower stream of interest incomes when compared to a scenario where rates were higher. As a result all else being equal this will reduce potential future incomes and most likely sales. This will lower the total future returns (money earning potential) of real investments.
This is why QE, where interest bearing assets are removed in exchange for non interest bearing by the fed, acts as a tax.
So, although the rate in which treasuries offer sets a floor on risk-adjusted remuneration of productive investments, these payments overtime may increase potential returns on productive assets.
The key here is the difference between the rate of return on real investments vs. treasuries. As long as their is a difference (whether or not treasuries offer negative real rates or positive) investors will have the option of taking more risk in search of higher returns by trading their treasuries to someone who is less willing to take the risk in the form of real investment.
When real rates are negative and people are forced to hold either currency or treasuries, their purchasing power is being systematically reduced. Someone must deal with this loss as all financial assets must be held by someone.
Jake, As you probably know, Warren Mosler recommends setting the overnight rate to zero permanently and ending tsy issuance other than 3 mo. T-bills as the maximum maturity, in that tsy issuance would non longer be needed to drain excess reserves. That plus is reform proposals for the financial sector would limit financialization and encourage productive investment.
Michael Hudson would add taxing economic rents — land rent, monopoly rent, and financial rent — but not gains from productive contribution. Progressive taxation does something similar but not as target toward discouraging rent-seeking, which is non-productive.
In fact, what I have been saying and writing for a long time. When reduced to the common denominator of hours of labor required to purchase a basket of goods, the dollar's purchasing power has gone up mightily.
Money cannot be reduced to worker productivity. They are two different things.
Money is money, and worker productivity is worker productivity. Taking money qua money into account, its value has declined, precisely because there are more of them. It requires more dollars to purchase goods today than in the past, because more dollars were created than real goods.
Ergo, properly speaking, the purchasing power of money has declined.
"It requires more dollars to purchase goods today than in the past, because more dollars were created than real goods."
Maintaining zero inflation would 1) put the economy in a position where it could easily slip into deflation, so the cb targets a slightly higher rate of inflation as a buffer zone, and 2) some inflation discourages hoarding money but using it instead. That increases consumption and investment, therefore both supply and demand. This has resulted in enormous real growth since 1913, way more than the cost of inflation.
@Rafael Barbieri,
But all else is not equal in a properly managed macroeconomy, because the state can always use the fiscal channel to make up for any deficiency in spending by bondholders who happen to lose their unjustified subsidies.
The key point here is not the ability of investors to improve returns by accepting more risk. The key point is that if an investor can make any strictly positive risk-adjusted return after all expenses have been paid, but is passing it up because interest rate policy sets a non-zero floor on risk-adjusted return, then at least one of the following must be true:
(a) Society is losing real wealth, because an opportunity to create net value added is going unexploited.
(b) Capital goods are underpriced, because the observed price of capital goods implies that the marginal socially gainful investment (with a total lifetime net value added of zero) generates a private surplus to the investor, which under efficient markets would have gone to the producer of capital goods. Underpricing capital goods may reasonably be expected to lead to underproduction of capital goods, thus stunting the downstream supply chain and impairing the future capital accumulation of society.
(c) The business model in question is predatory and should be outlawed. However, this has nothing to do with interest rate policy, and indeed predatory business models are more, not less, likely to pass the interest rate policy hurdle.
That negative real interest rates also disincentivise the holding of financial assets beyond what is strictly required by the liquidity needs of the economy is just a bonus, albeit a very welcome one. The sector of the economy which deals with shuffling around financial assets needs to shrink dramatically, and if negative real interest rates can help with that, then I would consider that a feature, not a bug.
- Jake
@JakeS
"That negative real interest rates also disincentivise the holding of financial assets beyond what is strictly required by the liquidity needs of the economy is just a bonus, albeit a very welcome one. The sector of the economy which deals with shuffling around financial assets needs to shrink dramatically, and if negative real interest rates can help with that, then I would consider that a feature, not a bug."
It may disincentivize investors from wanting to hold a financial asset at that given price, but the fact is the total quantity must be held by someone at all times. Now, if you want a policy that reduces the supply of these risk free interest bearing assets in order to force investors into other assets then that is what quantitative easing is designed to do. It may also be that investors are currently choosing to hold these assets at a negative rate because future inflation may be overstated. It may also be that the real economy is no longer producing a sufficient amount of safe assets
With that said, a specific supply of finance assets have been produced and must be held. If investors find these asset desirable they will bid on them to the point where the future potential return is diminished.
Negative real interest rates may even incentivize the creation of financial assets by the private sector. Businesses may decide to issue debt in this environment, which intern must be held by someone at a given rate. If done successfully, businesses will be able to acquire dollar balances, but it is up to them to use these
funds or not to bid up the price of capital goods in the real economy.
Capital goods may be underpriced because businesses are unwilling to use such funds to bid up these goods when attempting to acquire them. This may be due to their belief that higher prices for such goods are unjustified given their assessment of future potential returns.
@JakeS
With that said, bond holders are currently willing to hold treasuries at negative rates otherwise they would attempt to diversify away from such assets by accepting lower prices for them. This act in itself would raise real rates. Seeing as this is not currently the case, the more interest question is why are investors willing to hold such assets at these prices?
Are future rates of inflation overstated? Is the economy not producing a sufficient amount of safe assets (real or financial? Could it be both?
Tom Hickey:
Maintaining zero inflation would 1) put the economy in a position where it could easily slip into deflation
False. If the Fed can be credible in targeting 2% inflation, then they can be credible is targeting 0% inflation.
Investors and sellers don't decide to invest based on aggregate price levels. They decide to invest by taking into account price spreads. A 0% inflation can exist with unchanged factor prices that are lower than output prices.
Instead of investors expecting a price next year of $102, they will expect a price of $100, and price current factors lower as a consequence.
so the cb targets a slightly higher rate of inflation as a buffer zone
A 0% target inflation is exactly the same in terms of buffering, as 2%, as 10%, as any credible inflation rate target.
and 2) some inflation discourages hoarding money but using it instead.
If there is going to be an increase in cash balances on account of a slightly lower inflation rate, it's not like the increased cash holding is going to continually increase over time. No, the increase, if there is even going to be one, will be delimited. Instead of businesses holding 10% of their assets in cash, say, they will instead hold 15% of their assets in cash.
In real terms, nothing will change because assets prices will simply be lower. The economy will operate with slightly less spending, and slightly higher cash balances, and slightly lower prices. There is no continuous depression on monetary activity.
Just like the presence of risk free government debt doesn't compel investors to investing their entire incomes in government debt, so too would there not be 100% cash hoarding if future output prices are expected to rise by 0% instead of 2% each year.
Money is a medium of exchange. It's a myth to believe that less nominal dollars being spent somehow means there is less real wealth being produced.
That increases consumption and investment, therefore both supply and demand. This has resulted in enormous real growth since 1913, way more than the cost of inflation.
Revisionist claptrap. In the 20th century, real growth was very high, exceeding 10% in some years. Under that "tight money" standard, the US overtook the UK as the world's most prosperous economy.
Inflation really doesn't boost real productivity. It just redirects existing resources, and brings about booms and busts.
Sorry, I meant in the 19th century, real growth was very high...
>It may disincentivize investors from wanting to hold a financial asset at that given price, but the fact is the total quantity must be held by someone at all times.
But the fact is also that the supply of financial assets to a very large extent adjusts to meet demand. Indeed, disassociating demand for financial assets as a savings vehicle and borrowing as a mode of finance is the whole point of having a financial sector in the first place.
>With that said, a specific supply of finance assets have been produced and must be held.
Yeah, it sucks to be a holder of pre-existing fixed income securities if the government embraces a de-financialisation and re-industrialisation macroeconomic policy.
My heart bleeds for them.
>Negative real interest rates may even incentivize the creation of financial assets by the private sector. Businesses may decide to issue debt in this environment, which intern must be held by someone at a given rate.
But they need never enter the secondary market. Preventing the secondary market from setting interest rate policy is the reason the central bank extends rediscount facilities to private banks.
>Capital goods may be underpriced because businesses are unwilling to use such funds to bid up these goods when attempting to acquire them. This may be due to their belief that higher prices for such goods are unjustified given their assessment of future potential returns.
But that is beside the point. Beliefs about the future that in retrospect turn out to have been false impose costs under any interest rate policy. The point is that a non-zero rediscount rate imposes an additional cost on top of all the ordinary costs of doing business in a capitalist system.
- Jake
"If the Fed can be credible in targeting 2% inflation, then they can be credible is targeting 0% inflation."
It is not possible to observe the actual rate of inflation. The db guesstimates and leave a buffer of a couple percent for miscalculation and shocks.
BTW, I don't disagree that the cb really shouldn't be in the interest rate business for monetary macromanagement. MMT economists recommend consolidating the cb formally into Treasury since they are already informally consolidated. Failing that, some recommend setting the overnight rate to zero and issuing 3 mo . bills as max duration.
>With that said, bond holders are currently willing to hold treasuries at negative rates [...] the more interest question is why are investors willing to hold such assets at these prices?
Treasuries are cash-equivalent. They are not subject to credit risk and can be liquidated instantly to meet margin calls. In the current environment, credit risk for non-sovereign entities and the need to raise additional margin are high and subject to Knightian uncertainty. So people go all-cash, or cash-equivalent.
>If the Fed can be credible in targeting 2% inflation, then they can be credible is targeting 0% inflation.
No. The Fed can only destroy economic activity - it cannot create economic activity where none previously existed. And a deflationary environment imposes a positive feedback loop which accelerates the departure from a 0 % inflation target.
Furthermore, the Fed conducts its monetary policy through the interest rate channel, and this channel is only available as long as nominal rates remain above the zero bound. The 2 % inflation target is already too low for the central bank to consistently implement a Taylor-Mankiw rule in even routine recessions, let alone conduct activist, discretionary policy during a crisis.
>Investors and sellers don't decide to invest based on aggregate price levels. They decide to invest by taking into account price spreads. A 0% inflation can exist with unchanged factor prices that are lower than output prices.
Totally irrelevant, since the pernicious effects of deflation (and insufficient inflation) is not on factor prices - it is on the debt burden.
Debt servicing is, from society's point of view, chasing a sunk cost: The real resources expended in the investment have already been expended. Therefore, capriciously increasing the debt burden through deflation or inadequate inflation forces firms to expend ever greater vigour on chasing sunk costs.
Additionally, inflation serves to dissipate fluctuations in cash flows that would otherwise accumulate as a debt burden. (Imagine two agents connected by a cash flow, both of whose expected income equals their expected expenditures. Now impose noise on this cash flow. Given that the agents cannot react instantly to this noise, it will cause a credit balance between them (or between them and their respective banks). Unless wealth effects and real growth are sufficient to dissipate this credit balance (which cannot a priori be presumed), this will cause their equity to random-walk, eventually resulting in a bankruptcy.
Finally, bondholders are totally unproductive: They serve no function that the discount window cannot perform better. It is therefore economically safe to shaft them. As an added bonus, shafting the bondholders is distributionally sound as well - this is one of those cases where equity and efficiency really are aligned.
>If there is going to be an increase in cash balances
Cash balances are not the issue in terms of hoarding money. Fixed income securities are. Fixed income securities should have a negative risk-adjusted real return, to prevent trust fund babies. Because trust fund babies have pernicious effects on the political and social fabric of an industrial democracy.
- Jake
>In real terms, nothing will change because assets prices will simply be lower. The economy will operate with slightly less spending, and slightly higher cash balances, and slightly lower prices. There is no continuous depression on monetary activity.
This would be true only under money neutrality. And since money neutrality is utter quackery, it's not.
>Money is a medium of exchange.
False. Money is a token of state power.
>Revisionist claptrap. In the [19th] century, real growth was very high, exceeding 10% in some years.
That is indeed revisionist claptrap you are spouting - thank you for giving the reader a heads-up.
The maximum growth rate is totally, utterly and obviously irrelevant. What matters is the trough-to-trough growth, not how fast you can inflate a Ponzi economy during the boom.
And trough-to-trough growth was noticeably lower throughout the 19th century than during the Fordist political economy.
>Under that "tight money" standard, the US overtook the UK as the world's most prosperous economy.
Funny how you omit the genocide of the native population and stealing their continent. Oh, and the British involvement in the first world war. I guess those couldn't possibly have mattered.
Austrian idiocy. But I repeat myself.
- Jake
MMT is based on operational description of the existing monetary system. If that system changes, then the operational description will also change.
Hypotheticals are interesting, but they remain hypothetical. We can agree or disagree about a more ideal system, but until it is a reality, it doesn't make much difference.
Personally, I would like to see things different, but not in the same way you do. That makes of interesting conversation, but it doesn't have much relevance to the present situation.
Tom Hickey:
"If the Fed can be credible in targeting 2% inflation, then they can be credible is targeting 0% inflation."
It is not possible to observe the actual rate of inflation. The db guesstimates and leave a buffer of a couple percent for miscalculation and shocks.
They can guesstimate 0% then. 2% inflation does not act as any "buffer" over and above 0% inflation. Instead of pricing current factors of production what they are with 2% inflation, they are instead priced roughly 2% lower with 0% inflation.
Again, investors take into account price spreads, not price levels.
BTW, I don't disagree that the cb really shouldn't be in the interest rate business for monetary macromanagement. MMT economists recommend consolidating the cb formally into Treasury since they are already informally consolidated. Failing that, some recommend setting the overnight rate to zero and issuing 3 mo . bills as max duration.
Woopee.
JakeS:
"In real terms, nothing will change because assets prices will simply be lower. The economy will operate with slightly less spending, and slightly higher cash balances, and slightly lower prices. There is no continuous depression on monetary activity."
This would be true only under money neutrality. And since money neutrality is utter quackery, it's not.
False. It does not require an assumption of money neutrality. It only requires the quantity theory of money.
"Money is a medium of exchange."
False. Money is a token of state power.
False. Government monopolized FIAT money is a token of state power. It is not true that all money is necessarily monopolized by states.
Money arises in the market, not in the state. See history.
"Revisionist claptrap. In the [19th] century, real growth was very high, exceeding 10% in some years."
That is indeed revisionist claptrap you are spouting - thank you for giving the reader a heads-up.
Hahaha. It's not revisionist. It's factual.
The maximum growth rate is totally, utterly and obviously irrelevant. What matters is the trough-to-trough growth, not how fast you can inflate a Ponzi economy during the boom.
A 100% reserve gold standard is not a Ponzi economy.
And trough-to-trough growth was noticeably lower throughout the 19th century than during the Fordist political economy.
Hahaha, you're comparing the entire 18th century to a short period in the 20th? That's crazy. You should compare growth pre and post 1913.
"Under that "tight money" standard, the US overtook the UK as the world's most prosperous economy."
Funny how you omit the genocide of the native population and stealing their continent.
Hahaha, funny how that has nothing to do with the monetary system's effect on the real economy. Funny how you have to introduce a red herring about killing Indians.
It shows you have nothing.
Oh, and the British involvement in the first world war. I guess those couldn't possibly have mattered.
No, they don't matter. Not to the monetary system's effect on the economy.
Austrian idiocy. But I repeat myself.
Who's Austrian? Not me. I believe that governments are justified in killing, torturing, taking over money production, and doing anything they want, if they can get away with it. Might makes right.
"It only requires the quantity theory of money"
People still believe in the QTM?
>You purposefully avoid learning the vast libertarian writings
Yes.
I do not seek out the writings of libertarians for the same reason I do not seek out the writings of homeopaths.
>They can guesstimate 0% then.
No, they cannot, for reasons covered above. But even if they could, why should they? 0 % inflation confers no advantage over 2 %, 3 % or 7 %, except to lazy, unproductive parasites who believe themselves entitled to income without work or entrepreneurship.
>Again, investors take into account price spreads, not price levels.
And, again, price levels is not the important point. It is the rate of change of price levels that is important.
>False. It does not require an assumption of money neutrality. It only requires the quantity theory of money.
Horseshit, bullshit, it's all shit. Money neutrality and the quantity fallacy of money imply each other.
>False. Government monopolized FIAT money is a token of state power. It is not true that all money is necessarily monopolized by states.
Money is always issued by holders of political power. Sometimes, those holders are non-state entities. This usually indicates that you are in a feudal economy.
>Money arises in the market, not in the state. See history.
[Citation needed]
From actual historians and anthropologists. Rants by libertarian quacks need not apply.
>A 100% reserve gold standard is not a Ponzi economy.
The 19th century did not have a full reserve gold economy.
Not that it matters, because a full reserve gold standard would do nothing to prevent macroeconomic imbalances, except in the Austrian fantasy world where effect is permitted to precede cause. It just makes the adjustment more painful by forcing the adjustment to be made purely by the productive members of society, workers and entrepreneurs, while leaving banks and bondholders untouched.
>Hahaha, you're comparing the entire 18th century to a short period in the 20th? That's crazy. You should compare growth pre and post 1913.
You don't get to arbitrarily pick the time intervals to be compared. So sorry, but neither historical nor statistical time series analysis works that way.
The proper points of comparison are business cycles, trough-to-trough. Economic policies and external circumstance differed sufficiently throughout the 19th and 20th centuries that blanket comparisons are nonsense - in particular, such a blanket comparison tars the Fordist half of the 20th century with the poor performance of the Libertarian half.
>>Hahaha, funny how that has nothing to do with the monetary system's effect on the real economy. Funny how you have to introduce a red herring about killing Indians.
That was not your argument. Your argument was that your preferred quackery coincided with one particular country overtake another country (which by the way practised the exact same quackery - it would be equally true to say that Britain lost its position as hegemon while suffering under the gold standard idiocy). This being the sum total of your historical analysis, external circumstance such as gains or losses from external wars is highly relevant.
- Jake
Tom Hickey:
"It only requires the quantity theory of money"
People still believe in the QTM?
It's logically irrefutable. It has never been empirically falsified, never will be empirically falsified, because it's not even an empirical hypothetical proposition. It is true the same way saying square circles are impossible is true. It would be silly to believe the QTM has been empirically falsified.
JakeS:
"They can guesstimate 0% then."
No, they cannot, for reasons covered above.
You haven't shown any reasons above. You simply asserted it so, without any justification. If the CB can target 2%, then they can target 0%.
But even if they could, why should they?
Why should they target 2% as opposed to 5% or 0%? Your desired number is just as arbitrary as any other.
0 % inflation confers no advantage over 2 %, 3 % or 7 %, except to lazy, unproductive parasites who believe themselves entitled to income without work or entrepreneurship.
That's a myth. Nobody makes an income for doing nothing in a 0% inflation targeting scheme. Anyone who wants to earn an income has to work for money. One cannot earn an income by doing nothing.
2% and 3% confer no advantage over 0%, except of course to lazy, unproductive parasites who believe themselves entitled to free money from the printing press without work or entrepreneurship.
2% inflation just gives the initial receivers of the new money MORE unearned purchasing power, compared to 0% inflation.
Those who you are calling parasites, namely, those who actually have to work for their money, who experience a gain in purchasing power merely by virtue of holding onto their money, are not parasitical at all, because they had to earn their money.
On the other hand, those who invest in government debt, they are truly parasites, because government debt is financed by coercive taxation and inflation, both of which derive unearned gains to those who receive it.
You have it exactly backwards.
And, again, price levels is not the important point.
That's MY point, not yours. YOU are the one saying the price level is important. YOU are the one saying the price level has to rise 2% per year.
It is the rate of change of price levels that is important.
No, it is the price spreads WITHIN any given price level that is important.
Horseshit, bullshit, it's all shit.
What sophisticated and thought provoking analysis.
What's horseshit is your emotional zeal that is clouding your judgment.
Money neutrality and the quantity fallacy of money imply each other.
It's not a fallacy. The quantity theory of money is irrefutably true. But it does not imply money neutrality, if you understood what neutrality means. It means money has no effect on the real economy. It does not mean that prices rise exactly in line with monetary inflation.
Clearly money does have an effect on the real economy. Money couldn't even be money if it didn't.
Money is always issued by holders of political power.
False. When gold was money, it was not issued by any states. It was produced by private gold producers.
Money arises out of exchanges in the market. Sure, states can thereafter take it over, and impose a fiat money system, but it is not necessary for money to exist.
Sometimes, those holders are non-state entities. This usually indicates that you are in a feudal economy.
Oh please. Old crusty Willy the prospector who pans for gold in the river isn't a politician.
"Money arises in the market, not in the state. See history."
[Citation needed]
Hahaha, and where are all your citations Mr. No Citation?
From actual historians and anthropologists.
Actual historians show that money can and does arise in the market.
JakeS:
Rants by libertarian quacks need not apply.
I'm not a libertarian. I believe that people have a right to initiate force against innocent people and their property, if they can get away with it, if it increases their happiness.
The 19th century did not have a full reserve gold economy.
Indeed, and that's precisely why there were booms and busts even then too.
Not that it matters, because a full reserve gold standard would do nothing to prevent macroeconomic imbalances, except in the Austrian fantasy world where effect is permitted to precede cause.
You haven't shown how macroeconomic balances would arise in a full reserve gold standard.
I am not an Austrian.
It just makes the adjustment more painful by forcing the adjustment to be made purely by the productive members of society, workers and entrepreneurs, while leaving banks and bondholders untouched.
Aw, you're so concerned about people feeling pain? How about the pain of having their purchasing power constantly taken from them by monopoly money printers? What about the pain of the inflation induced boom bust cycle that leads to tens of millions without jobs? Fuck them right? As long as the state has control over money, that's all that matters.
Price deflation harms banks and bondholders.
You don't get to arbitrarily pick the time intervals to be compared.
Yes, I do get to pick them, if we're comparing fiat money with classic gold standard. Then we have to select pre and post 1913.
YOU don't get to arbitrarily pick the entire 19th century and compare it to only a small portion of the 20th century when everything was hunky dory.
So sorry, but neither historical nor statistical time series analysis works that way.
Historical and statistical comparisons between fiat money and non-fiat money (classical gold standard) proves you wrong.
JakeS:
The proper points of comparison are business cycles, trough-to-trough. Economic policies and external circumstance differed sufficiently throughout the 19th and 20th centuries that blanket comparisons are nonsense - in particular, such a blanket comparison tars the Fordist half of the 20th century with the poor performance of the Libertarian half.
Then gold wins. The early 20th century saw the worst economic calamity in the history of the country, and in 2008 we saw the second worst calamity in the history of the country, BOTH under fiat money, not gold money.
You can't compare the entire 19th century to only a small portion of the 20th century. You have to look at the whole picture.
"Hahaha, funny how that has nothing to do with the monetary system's effect on the real economy. Funny how you have to introduce a red herring about killing Indians."
That was not your argument.
Yes, it was my argument. That's been my argument the whole time.
Your argument was that your preferred quackery coincided with one particular country overtake another country (which by the way practised the exact same quackery - it would be equally true to say that Britain lost its position as hegemon while suffering under the gold standard idiocy).
That's saying the same thing, only far more immaturely, and hilariously.
If the US can go from an agrarian society to the most prosperous economy in the world under a gold standard, which by the way did NOT include the UK being under a gold standard, since the Bank of England was founded in 1694.
Your preferred quackery of toilet paper money in the world's most dominant economy, failed to keep dominance over a poor country with an impure gold standard.
This being the sum total of your historical analysis, external circumstance such as gains or losses from external wars is highly relevant.
Inflation encourages wars. It enables states to finance themselves over and above what only taxation and borrowing can enable.
I bet you had no clue that the NY Fed (at the time secretly) send over $40 billion to Iraq from 2003-2008. The debt the Treasury issued is ultimately financed by inflation as well.
Wars are exacerbated when the war mongers can print their own money.
Your entire post is nothing but an epic failure.
MV = PQ is an accounting identity that is a truism (tautology). The question is the causality that gets attached to it in the QTM.
There was an empirical test by the Fed when they tried targeting quantity (monetary base) and it failed. They then realized that there is no causal connection between the monetary base and money supply. Money supply is endogenous, not exogenous as QTM erroneously assumes. So now they target price (interest rate).
MV = PQ is an accounting identity that is a truism (tautology). The question is the causality that gets attached to it in the QTM.
Good lord.
The PV=PQ identity is just a modern explication of the QTM. It is not "the" QTM.
The quantity theory of money just says that all else equal, an increase in the quantity of money will lead to prices being higher than they otherwise would have been if the increase didn't take place.
This proposition can never be empirically falsified.
There was an empirical test by the Fed when they tried targeting quantity (monetary base) and it failed.
The monetary base isn't the money supply. It is a portion of the money supply.
The money supply includes more than just base money.
It's like you printing $100, and me burning $100, and then you wonder why general prices didn't rise on account of your printing $100.
M3 contains a substantial portion of credit derived money, and when this debt is defaulted on, the money supply shrinks to that extent.
While the Fed was drastically increasing base money post 2008, M3 was collapsing, and went into negative territory.
Because M3 was collapsing, it means "the quantity of money" was collapsing.
They then realized that there is no causal connection between the monetary base and money supply.
But there is a causal connection, it's just not nice and constant and predictable.
Money supply is endogenous, not exogenous as QTM erroneously assumes.
False. The Fed is not an endogenous institution. The Fed does create money. Because of that, the money supply is in part exogenous.
"This proposition can never be empirically falsified."
An assertion that can never be falsified is a either tautology or else nonsense. Tautologies say nothing other than about the relationship of terms constituting them. They can never imply causality.
I came with full enthusiasm to see if Dollar losing it's value over time was a myth.
I saw that the author conflates rising income,along with increased productivity with purchasing parity.
I leave seeing that it was not a myth after all,and the author did NOTHING in this regard.
Bonkers that nobody called out Major_Freedom (natch) for twice stating this sentiment:
"I'm not a libertarian. I believe that people have a right to initiate force against innocent people and their property, if they can get away with it, if it increases their happiness."
DING-DONG, SOCIOPATH CALLING!
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