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    (Original post by Davetherave)
    Are you asking because you don't know or are you trying to lead me somewhere?
    I honestly don't know. Please explain. Will the global economy carry on like nothing's happen or will there be huge consequences ?
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    (Original post by The_Adarshster)
    I honestly don't know. Please explain. Will the global economy carry on like nothing's happen or will there be huge consequences ?
    Well in my somewhat rusty opinion, changes in the price of gold in and of themselves have a fairly negligible impact on the world economy. Some countries rely heavily on exporting gold so they will feel the effects, as will industries that use gold in manufacture, and also jewellers, but since gold is not oil and is not a used that heavily as an input there shouldn't be too much commotion.

    If some countries fix their currency to the price of gold, on the other hand, then there can be quite serious effects. In that case a sudden shift in the price of gold is equivalent to a sudden shift in the strenght of the currency. If pounds are tied to gold and gold crashes, then the same amount of dollars will buy more gold and hence more pounds.
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    (Original post by DrunkHamster)
    Well, it's not metaphysically or logically impossible for there to be a contraction in the money supply, but it still won't happen.

    How could there be a large scale (i.e. at all significant) reduction in the amount of gold in human hands? People would have to actually consciously destroy it (and the kind of people crazy enough to do this most likely won't have much money to begin with) or there would have to be a natural disaster which somehow manages to lose more physical cash than is being mined. Either way, the level of improbability is sufficiently high for me to say it just won't happen.
    Surely as the population increases each person will have less gold?
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    (Original post by Apagg)
    Surely as the population increases each person will have less gold?
    But (a) the proportions (not sure if that's significant) and (b) the total amount will stay the same.

    Besides, you could say just the same about any kind of currency.
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    Yep - of course the amount of gold per head would go down, but the purchasing power of gold would necessarily rise to adjust for this.
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    (Original post by DrunkHamster)
    Yep - of course the amount of gold per head would go down, but the purchasing power of gold would necessarily rise to adjust for this.
    I think I'm getting up to speed here. It's because there's less of it to go round, so each ounce (or whatever) becomes more valuable to whoever's got it, so traders/shopkeepers/widgetmongers have to "offer them more" (in very crude terms) to get you to part with it. Right?

    I'm not good with Economics
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    (Original post by Agent Smith)
    But (a) the proportions (not sure if that's significant) and (b) the total amount will stay the same.

    Besides, you could say just the same about any kind of currency.
    Except you can print paper money to prevent this kind of devaluation
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    (Original post by DrunkHamster)
    Yep - of course the amount of gold per head would go down, but the purchasing power of gold would necessarily rise to adjust for this.
    But you'd still have deflation
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    (Original post by Apagg)
    Except you can print paper money to prevent this kind of devaluation
    That's the whole problem. If you look at history, simply printing more paper money has never, ever solved matters. It's invariably done by panicking governments, and it invariably exacerbates whatever it was they were panicking about.
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    (Original post by Agent Smith)
    That's the whole problem. If you look at history, simply printing more paper money has never, ever solved matters. It's invariably done by panicking governments, and it invariably exacerbates whatever it was they were panicking about.
    No. We're constantly printing money and it doesn't cause us problems because we manage it properly - some money growth is needed for the good of the economy. Printing money can cause problems, yes, but so can having a currency that people can dig out of the ground.
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    (Original post by Apagg)
    But you'd still have deflation

    Aaaaaaargh did you read my first post? Yes, we would still have deflation. But it would be growth deflation rather than classical (bad) deflation in the sense of a contraction in the money supply. Unless you can explain why growth deflation is a bad thing, I can only respond with a "so what?"
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    (Original post by Apagg)
    No. We're constantly printing money and it doesn't cause us problems because we manage it properly - some money growth is needed for the good of the economy. Printing money can cause problems, yes, but so can having a currency that people can dig out of the ground.
    It causes the bust/boom business cycle, it is a hidden tax on holding cash, it is a systematic incentive to spend rather than save (and you wonder why people are in so much debt; well, they respond to incentives...) and yet you don't think it causes problems? :confused:
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    Prices would have to fall, right? That has the usual negative effects of deflation, as far as I can see - expectations, "shoe leather", etc.
    I'm not really a big fan of money supply theory, so perhaps there are things I'm missing
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    Seignoriage revenues are relatively small. Your first post seems to ignore the use of a price index, or is simplifying for non-economists - a low level of inflation as measured by the CPI is rather handy. It is, for example, hard to enact real wage changes with a constant or falling price level.
    Boom-bust is caused by factors other than money growth - Friedman wasn't entirely right.
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    (Original post by Apagg)
    Seignoriage revenues are relatively small.
    Really? Say in one year we achieve the "reasonable" target of 3% price inflation. If the economy is growing at 5%, what this really means is the money supply has expanded by 8%. Someone gets to benefit from the money getting printed; and exactly like counterfeiting, it's whoever gets to spend it first. Which in this case is.... the government and the banks. Interesting fact: at the peak of the dot-com boom in 1998, the US money supply (M3 I think, might be wrong) increased by 18%. Now if overall inflation was 2%, you've gotta ask yourself who was pocketing the difference...

    You want to be really cynical? Compare the timing of the biggest increases in the money supply with when countries have gone to war. You'll realise how they pay for it...

    Your first post seems to ignore the use of a price index, or is simplifying for non-economists - a low level of inflation as measured by the CPI is rather handy. It is, for example, hard to enact real wage changes with a constant or falling price level.
    I pointed out the problems with even trying to find an "average price level" in my original post. And the 19th century - a century of sustained price deflation and real wage increases seems to be a bit of a counterexample.

    Boom-bust is caused by factors other than money growth - Friedman wasn't entirely right.
    Well, I hate to be rude, but you've done a brilliant job of convincing me otherwise! (P.S. I don't agree much with Friedman - if you want to see where I'm coming from read Austrian stuff like Mises, Rothbard and Hayek)
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    That's still relatively small. I'm also confused by your maths there...what are you using for that?

    I should have specified real wage reductions I suppose.
    I can't be bothered to be sent to an endless list of links by you again, really.

    I don't see a critique of price indices in your OP
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    To be honest DH I wasn't going to post again as, as I stated earlier, these types of discussions are unspeakably annoying and it's becoming increasingly apparent that I'm not actually discussing anything with you but with the Von Mises Institutes via you.

    I just thought I'd try and make my earlier parallel even more simple:

    Assume the gold standard
    Assume Productivity is 2 (i.e. 1 unit of input generates 2 unit of output)
    Assume that Fischer holds true and that Velocity is ~constant, say it tends to 1


    An Economy contains 100 units of gold
    It also contains 50 units of the factors of production, which generates 100 units of output

    (100*1)/100 = P = 1


    The economy now contains 50 units of gold
    It also contains 50 units of the factors of production, which generates 100 units of output

    (50*1)/100 = P = 0.5

    This is the deflation you say is bad


    The economy contains 100 units of gold
    It also contains 100 units of the factors of production, which generates 200 units of output...you can probably see where this is going

    (100*1)/200 = P = 0.5

    This type of deflation is more 'meh, so what?', apparently. This is not the isolated instances of productivity-induced deflation that coalesce to form the 'growth deflation' defined by the von mises institute and deemed to be good (a view that, on balance, I have little problem with and to some extent agree with); productivity is constant throughout. Rather it is everywhere and always a monetary phenomenon. It is an identical phenomenon of broad-based deflation as is induced by a contraction of the absolute quantity of money; all that matters is the relative quantity of money.

    Unless this issue is fixed a Gold Standard will always fail. Somehow, though, I doubt the Von Mises Institute would encroach upon their Libertarian credentials and amend their gold standard system to include an inevitably coercive control over the per capita supply of gold or something similar...
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    It is an identical phenomenon of broad-based deflation as is induced by a contraction of the absolute quantity of money
    I don't think you're getting the point at all, and while it may be unspeakably annoying to you I feel like I really should respond.

    Growth (i.e. increases in productivity) causes a reduction in the price level (i.e deflation). A contraction in the money supply causes a reduction in the price level (i.e. deflation) too. Somehow you conclude that this means they are the same phenomenon?

    A->C
    B->C
    therefore A=B,

    is unfortunately not a valid argument.

    Growth deflation and contractionary deflation, while having identical effects on the price level are completely different phenomena. I really think much of the opposition to the gold standard is from people who conflate these two things for one reason or another.

    Also, I'm quite flattered that you think I've got the von Mises Institute's line on this exactly. I've read quite a bit about economics out of interest, and the Austrian school seems like it has pretty compelling reasoning. However, as I have had no formal economics education since A-level, I'm always a bit sceptical - I'd say I'm 80% sure I agree with the Austrians. On the other hand, I've asked a lot of people interested in economics (some students and even a few lecturers) why the Austrians are wrong and have been utterly unconvinced so far. So if you want to actually get down and talk about the gritty details with me, think of this as your chance to convert someone away from heresy and back to neo-classical economics if you like.
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    (Original post by DrunkHamster)
    I don't think you're getting the point at all, and while it may be unspeakably annoying to you I feel like I really should respond.

    Growth (i.e. increases in productivity) causes a reduction in the price level (i.e deflation). A contraction in the money supply causes a reduction in the price level (i.e. deflation) too. Somehow you conclude that this means they are the same phenomenon?
    Not in the slightest. I honestly can't fathom why you're still missing the point. Can someone else please pipe up if they're similarly missing it.

    I thought I made it patently obvious that productivity was constant.

    I'll try another way of putting it. If the gold standard is operating and all of a sudden the earth sprouts an identical twin with an identical economy, except that this twin contains no gold. The money supply has remained constant but suddenly the quantity of the factors of production is twice what is was previously and the real value of the economy is also twice what it was before. There has been no change in productivity but there has been an increase in real GDP. Consequently, if Fischer holds true and velocity is constant, there has been deflation. 'Growth deflation' has not occurred as this is not a malign effect of productivity. This is an effect akin to a contraction in the supply of money as the aggregate price level is only a function of money supply relative to real output.
 
 
 
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