Not worth a Confederate Dollar Part II
My previous answer was somewhat flippant, for which I hope you will excuse me. Let me address your points more seriously:
Let us suppose, for the sake of argument, that I grant your main point—it is both in the best interests of the general welfare, and a legitimate and constitutional act, for the state to discover who is holding money instead of investing it, and, in order to encourage investment, to reduce the value of that held money by debasing the currency, or by printing up currency to inflate the currency value as against all other goods and services in the economy. Let us suppose I grant this.
Question 1: Under this theory, what useful economic benefits (if any) that come in times when the state, in its wisdom, deems it wiser for me to invest than to hold money would not also be obtained if I lived next door to a large and well organized counterfeiting ring?
Your comment was this:
Savings are only bad in the keynesian economic model if savings are not put in banks.
Keynes did not put the government outside of economic rules, only that they are to counterbalance what shortsighted people are doing. When times are bad and people are spending less, not to save for rainy days, but for when the rain stops– and are not placing it in banks that will lend it out, but in their mattresses, the government needs to keep money flowing by spending, as no one else has enough money to offset everyone else’s bad impulse.
So, under this theory, could I not with equal logic say that the counterfeiting ring next door prints up phony money to counterbalance what shortsighted people are doing. If I am not spending enough of my hard earned money by investing in the currency market, if supply and demand lowers the interest rate, it is because many customers want to borrow money and fewer creditor want to risk loaning it at that rate, so the rate changes to compensate. But if The Penguin (let us say) and his henchmen print up a few hundred million greenbacks in their basement, then more money will enter circulation and the money supply will increase, and the law of supply and demand will lower the credit rate artificially.
Now then, the Penguin and his henchmen have not added one tiniest unit of work to the universe, performed no services, added no natural resources, added no value to anyone’s life, satisfied no needs and sated no wants. All they did was print up phony currency. This means that if the interest rates drop, borrowers will take risks with the currency, and lenders loan at lower rates than this left of risk warrants, because the real amount of money (the representation of labor, goods and services),
has not changed. All that will happen is a speculator’s bubble. Marginal projects, sub-prime mortgages, and bad investments will be indulged. When the bill comes due, in reality there is not enough money in the economy to justify that level of risk. The mortgage will not be paid back. The risky investment will not pay off.
You see, when you live next door to a counterfeiting ring, all that happens is that the market reacts to a false signal in the price structure. The interest rate drops, not because more work, more real value, has been added to the system, but only because phony currency is added to the system.
Question 2: Let us suppose that the police, when they catch the Penguin and his counterfeiters, instead of arresting the crooks, get a call from the White House. FDR has just been elected, and he wished to enact Keynesian economics. The interest rate is high at the moment, and FDR wants it lower, because, in his Olympian godlike judgment, he knows better than the investment market and the banking industry what the interest rate should be. Suppose all this. Is there any reason why FDR cannot simply tell the police to let the Penguin print up counterfeit bills until such time as the market reaches full employment, or whatever other chimera Keynes policies seek?
Q3: Is there any reason, even an iota of difference, between using the Federal Reserve Board to inflate the currency and using the Penguin?
Q 4: Are there any bad side effects to inflation? Is there any way for the government to avoid these side effects?
Q5: When should inflation be cut off?
Q6: Can the government ever, as a matter of practical politics, afford to cease or reverse inflation?
Q7: Is stagflation possible in the Keynesian economic model?
Q8: If Keynes did not predict stagflation, on what grounds do we assume the rest his model is sound?
A measure of an economic system’s wealth is aggregate value of all transactions at any given time. If the money supply expands for any reason (like oilpatch revenues in Alberta) extra local money bids up the cost of available transactions and the result is inflation. Spain experienced this after the conquest of the New World and the situation was worsened by the prices going up for everybody, but only a few people had the extra gold, which they frittered away by buying imported luxury gods at inflated prices.
A change in the world gold supply would certainly inflate the currency for a period, until the market corrected for the new level. Under fiat currency, however, the state is not bound to the reality of gold mines in the New World. Any amount of currency its imagination can envision can be printed up at any time: only the pragmatic consideration of avoiding hyperinflation and flight to real values prevents the political class from inflating the currency indefinitely.
Let me bring to your attention another consideration.
The money value of Spanish doubloons and pieces of eight did not falter or fail when the Spanish throne changed dynasties. The coin was still good in remote islands in both hemispheres, even places not influenced by Spanish hegemony.
However, the fiat currency of the Weimar Republic in Germany failed to keep its value from day to day or even from hour to hour, since that value was, in effect, merely the willingness of the holders of worthless banknotes to believe that the Weimar Republic would collect enough taxes from German workers to redeem the face value of the paper. When that belief failed, the currency lost its currency. Gold, on the other hand, is real, and retains its metal value even if the face value changes.
To spend a Spanish Real in the Americas, no treaty was needed between the hemispheres. To spend a German Mark, on the other hand, the agreement and consent of the local government was needed, to fix the exchange rate. Real money has a real exchange rate set by the market.
Question 9: Fiat money has only the fiat exchange rate set by the treaties and policies of the central banks of the two nations involved. Do you see any drawbacks to this?
Q 10: If there is something alarming or wrong about the Spanish inflation caused by the exploitation of gold mines in the New World, and limited by the rate of gold mining, what makes the inflation caused by the German Weimar Republic less alarming?
Q 11: Surely all the features present in the Spanish case are present in the German case, with the additional drawback that the German inflation is hyperinflation, having no necessary upper limit before total financial breakdown and a return to a barter economy?