OK, I'm going to chew on this a bit. I'm thinking economy growing, needs capital to do it part of that means more credit is demanded, and if the money supply is stable, the real interest rate increases. You're saying a fixed money supply doesn't effect that equation because purchasing power balances out.
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The real interest rate does not increase unless social time preferences increase. The money supply has
no effect on the interest rate, unless it is being manipulated by the government via credit expansion (again, the only form of monetary inflation which can have that effect).
Wouldn't it be better to have a money supply expanding at roughly the rate of the economy so there would be no need for PPM adjustments? Rather than a deflationary situation were prices decrease, a stable situation where prices don't change?
Setting aside the difficulty of achieving this "ideal" (the PPM cannot be measured!), it is important to ask whether such a state of affairs is even desirable. Again, the money supply is one of four factors which affect the PPM. If the supply of goods increases due to a net investment in the economy, real wages will rise as
prices fall. If more people wish to add to their cash balance and "hoard",
prices fall. And vice versa for both situations. You are proposing a supposedly "stable situation" in which individuals could not benefit from the productivity gains of industrial progress, and in which they could not demand more money because any increased demand for money will change price levels. Do you really want that?
Which recession are you talking about that represents the devastating consequence of your bubbles? 2001 as a result of the stock market bubble? I agree there was a bubble, caused by internet frenzy. But hardly a devasting rescession. Inflation adjusted GDP never fell over a year and unemployment topped out at 6%.
I suppose it depends on what you see as devastating, but I don't think I used that term. The point is that the effects of credit expansion were quite apparent during 2000-01, and during previous recessions.
I would never posit that credit expansion leads us along a magical road to properity. In fact the contrary can happen if it is too great. I questioned whether (modest) credit expansion creates an unsustainable boom. I see your point. But isn't another problem with credit expansion (based on interest rate manipulation by the Fed) is that it creates the danger of inflation by expanding the money supply? Which is why the Fed is increasing rates now, to prevent that. But your point a commodity standard can do this better.
The
degree of credit expansion is simply unimportant for our purposes. We are here concerned with the effects that every dollar of inflated credit will have on the economy. How much damage the central bank does in the long run, will depend on its current policies.
Also, under a commodity standard there is no problem of the boom-bust cycle. Business fluctuations will still exist, but they will reflect actual changes in savings and investment levels rather than a huge amount of fiat credit being dumped onto the time market. And we can safely assume they will be less severe and less sporadic.
I would note as well that in an economy where the state does not expand credit, but inflates money in other ways, there is no boom-bust cycle either. Of course, political control of the money supply will have other devastating effects on the economy, and I'm certainly not advocating it.
Is there something inherently bad about modest expansion of credit, if it does not increase the money so much as to create inflation?
Expanding the money supply
always creates inflation. Where it does not, it has been offset by the other factors I was referring to earlier.
Only if they have gold reserves to do it. How could they expand credit and lend more money if they don't have it?
It's possible under a system of fractional reserve banking, which is what we've had since almost the beginning of the Republic.
Are you saying as a factual proposition that business cycles were not worse, or agreeing they were worse but not because of who controls the money supply?
I would say recessions in the 19th century were about as bad as the ones in the early 20th century. But there was still credit expansion in those days, regardless of the gold standard, and in some ways it was worse than it is today.
I think see with your point in concept. I question that the relatively modest monetary growth has been a major cause of these cycles. Why doesn't the PPM equalization also pertain to the investment markets? If there is credit expansion, the increase in money is used for all kinds of things, from paying employees to goods and services to investment. If the credit is eased too much, too much money causes the PPM equilbrium to adjust and prices go up. Why is more money relatively invested so as to cause malinvestments?
Because it's not primarily the PPM which is the problem, it's the interest rate. In most cases, the PPM component to the interest rate is highly temporary and disappears very quickly. The problem is, the market interest rate (excluding the PPM component) is
distorted by credit expansion. There is an illusion that more savings in the economy exist than actually do.
In other words, there is an idea that an
inceased supply of present goods exists on the time market. The nature of credit expansion means that its primary damage will be done to the interest rate. And to repeat one more time, credit expansion is the only form of monetary inflation which can have these damaging effects.
Another question, aren't there times when an artificial credit expansion can be a good thing? In a recession for example where you are trying to encourage economic activity?
And create more, new malinvestments while the markets are trying to get rid of the old ones? I don't think so
It is important to understand that the recession exists to correct the mistakes of the unsustainable boom. If you start another unsustainable boom during the recovery period of recession, then you are just repeating the cycle. One day, we need to decide whether we want to break the cycle or continue the current course.
