Ether said:
Why is "deflation" (here defined as a general decline in prices rather than any change in money stock) a bad thing? Falling prices are the mark of industrial progress. Even if the money supply is constant, the purchasing power of each unit is increased or decreased in accordance with the goods in society. Again, the quantity theory of money which you are basing your entire analysis on is completely fallacious.
You are making the fallacious statements not. The purchasing power of each "unit" is not increased or decreased. Those with fixed sources of income experience a relative increase in their PP as prices drop. Those paying fixed rates for loans will find themselves paying more in real terms. Those without fixed incomes, ie on salaries, will see their salaries drop. And eventually, their real salaries drop relative to the fact that those on fixed incomes do not drop and acquire a greater proporation of the income.
I will agree that small changes are not particularly harmful, although no one likes to see their salaries cut. Even though inflation has been about 3%, it does not appear to be harmful because the change is gradual over time. More rapid changes -- inflationary or deflationary, are more harmful because the impact of the change is greater.
I'll concede that point. It makes sense to me

Again, however, the current situation isn't much better. If you understand the intricate workings of central banking (the intricacy specifically designed to confuse the average joe), then you'd know that the Fed already creates money out of thin air and lends it to the government.
I never said the Fed did not create money. That is its function in controlling the money supply. The question is whether that function should be controlled by the Fed, Congress, some other entity, or left to the whim of the supply of some commodity.
You say the current situation "isn't much better." I disagree. The current situation could be much worse with poor monetary policy. Again, look at the histories of Argentina an Chile for examples of what poor monetary policy can cause. Hyperinflation.
We misunderstand each other. I'm not arguing that high inflation is a bad thing. My point is that high inflation is only possible under a regime of fiat money. Under the gold standard, there is a market-imposed limit upon how much the gold stock will increase. The profitability of gold production is the limit. With a banking cartel that can create money out of thin air, there is no such limit.
I agree that with a commodity based currency, some institution cannot create high inflation by printing money. However, I disagree that commodity supply is stead over time. The production of gold can decrease or increase. And remember when the Hunt brothers tried to corner the silver market a couple decades ago?
I disagree there "is not limit" having the money supply under the control of an quasi-independent entity like the Fed makes sense too. True, there is not fixed supply limit, why would the Fed want to create an environment of high inflation? What incentive is there for it to do that? That is just as much of a "limit" as market factors "limiting" gold producers from "oversupplying" the market.
As long as the PPM changes due to market forces (supply and demand of money, as well as the supply and demand of goods), there is nothing wrong with a little inflation.
Which has been the status quo since the late 70s.
Let me repeat, this short term effect is artificial. The real interest rate, or the social investment-consumption ratio, still holds throughout any credit expansion. It is in fact when this ratio is re-asserted that we enter a depression.
Credit expansion is merely a unique form of monetary inflation. It is the only one which will artifically lower the interest rate. A change in the stock of specie will not affect the social interest rate (though individual time preferences may change due to losses in income from inflation, these losses will be offset by gains elsewhere).
The laws of supply and demand always apply. But your biggest mistake is tying the money supply and interest rate together. I'd be willing to guess that you're econ professor was a Keynesian. Only Keynesians believe the money supply and interest rate are some strange, unnatural forces which need to be manipulated by the government.
You misunderstood my question. I do not disagree with you -- I agree that if there is a change in the money supply, after the "artificial," short term affect on interest rates, the rates will go back to their "normal" level.
I certainly do not believe or suggest that interest rates need to be manipulated by the Govt. I do suggest that the money supply needs to be manipulated to control general inflation/deflation (which is what the Fed has done since 1979), and that it is better to have a quasi-independent central bank do this that basing it on some commodity.
My question was: what happens to interest rates in a constantly deflationary environment, or, similarly, in an environment where the population and economy is growing, but the money supply does not? In both situations, you will have, until the PP effects are transferred throughout the economy, short term increased demands for available money. Supply and demand dictate that demand will cause an interest rate to "artificially" rise.
Eventually, salaries will be cut, as a result of higher interest rates, production may decrease, prices will fall, and there will be more money available, and interest rates would stabilize back to their "normal" levels.
What happens if the money supply marginally contracts again?
Sorry, I have to clarify that statement. See above for the differences between credit expansion and increases in the stock of specie. Increases in gold supply cannot lead to the boom-bust cycle; it cannot be perpetual or extremely high because of the limit of profitability; and the increase is not a total waste asset, whereas with credit expansion the government gets plenty of brand new fiat dollars to spend and "inflate" with. Those gains the politicians enjoy are offset by the general population. Unlike with the gold standard, this is not a voluntary arrangement.
The Fed, in expanding the money supply, lends some of it to the Govt (which then has more money to spend), only if the Govt is borrowing money, which it has done to a sickening degree in the last four years. Which is the point of this whole thread. But it still represents a debt of the Govt.
You are suggesting that under a gold standard, the Govt cannot borrow money?
Relying on the consumer price index is probably the worst way to determine the effects of monetary inflation. It is almost never the "housewives' basket" of consumer goods which go up in price due to credit expansion. We must look to the capital goods' markets (housing, stocks, bonds, etc), and once we do we'll see that there have been several inflationary bubbles since 1980, all leading to the same result.
But these things (housing, stocks) have
always had "inflationary bubbles", that has nothing to do with the money supply or what standard we are on. There were huge "inflationary bubbles" (and bursts) in stocks before we left the gold standard. It has to do with market demand speculation, greed and fear, more than money supply.
That's why economists always preach about the "new era of prosperity" and point to low inflation and high growth rates as evidence, and then have egg on their faces when the crisis hits.
I certainly do not suggests that the Fed or economists are able to perfectly control the economy. I would certainly disagree with anyone who suggests that. There are too many other factors that affect the economy and markets other than the money supply.
What a ridiculous system! How on earth could the banking cartel inflate the money supply and expand credit if there is no fiat currency.... oh wait :lol
I am still waiting for you to explain to us how the Fed's managment of the money supply since 1980 has caused problems that being on a gold standard would have solved. Or otherwise. The only thing you have hinted at so far is the stock market and (apparently) more recent housing "inflationary bubbles." Are you suggesting that the dot-com over-speculation in the stock markets was caused by over-expansion of the money supply by the Fed? Are you suggesting that the fiscal irresponsibility of the Govt in running 1/2 trillion dollar deficits since Bush got elected is because of an over-expansion of the money supply?
What problems have been caused by the Fed's mis-managment of the money supply you are suggesting? Inflation? If so, you are again making inconsistent statements. In this same thread you have again stated that
there is nothing wrong with a little inflation and then imply that the "banking cartel" (?) inflating the money supply is a big problem.
What exactly has the big problem with the money supply since 1980?