American Economics Thread

Sinnavuuty

Senior Member
Registered Member
The growth of an economy has to be accomodated by the growth of the monetary base.




No, it's not. Price decreases due to production efficiency is completely different from price decreases due to an insufficient monetary base. When this happens, investment and spending is disincentivized. This is why the monetary base has to grow as the economy grows.



Which is what we're talking about. You're complaining about US money supply growing. You brought up the growth in money supply 1980-2000 as an example. I pointed out that rGDP did in fact grow (as did other economic activity metrics) which means that the money supply also has to grow in order to accomodate this economic growth.

Bringing up deflation due to production efficiencies is completely off-topic.
They cannot and should not grow in the same proportion.

The monetary base does not have to grow for the economy to grow. The entire world spent much of history growing with an almost restricted monetary base due to the gold standard because of constant increases in the standard of living due to the proficiency of new forms of production. To say that a monetary base has to grow as the economy grows is to say that in the past, no economic growth occurred, because the monetary base did not grow in the same proportion as economic growth, but in fact it was just the opposite.

The monetary base does not have to grow at the same rate and that is what you are not understanding. GDP growth is driven by an increase in the money supply, which ends up creating bubbles that were created over the decades since the departure of the gold standard. This ends up generating unproductive investments, but manages to capitalize on economic growth based on a demand that it simply doesn't exist, but the problem is that the bubble ends up bursting and today the USA is a bubble economy and this has been a natural consequence of leaving the gold standard.
 

HighGround

Senior Member
Registered Member
They cannot and should not grow in the same proportion.

Um no, they should. In fact, the monetary base should expand ahead of the economy so as to not constrain it, same as the other way around.

The monetary base does not have to grow for the economy to grow. The entire world spent much of history growing with an almost restricted monetary base due to the gold standard because of constant increases in the standard of living due to the proficiency of new forms of production. To say that a monetary base has to grow as the economy grows is to say that in the past, no economic growth occurred, because the monetary base did not grow in the same proportion as economic growth, but in fact it was just the opposite.

Gold Standard =/= Monetary base not growing.

So no, the monetary did in fact expand. In fact, Rome's greatest period of Pax Romana saw exactly that happen. A steady and controlled expansion of monetary stock. Go back, and look at history, every massive economic expansion resulted in a similar expansion of the money supply.

The monetary base does not have to grow at the same rate and that is what you are not understanding. GDP growth is driven by an increase in the money supply, which ends up creating bubbles that were created over the decades since the departure of the gold standard. This ends up generating unproductive investments, but manages to capitalize on economic growth based on a demand that it simply doesn't exist, but the problem is that the bubble ends up bursting and today the USA is a bubble economy and this has been a natural consequence of leaving the gold standard.

Lol.

CPI volatility was far greater during the gold standard. Additionally, bubbles and crashes were commonplace during the gold standard as well.

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You can also look at what happens when the money supply does not grow in line with the economy, particularly when it is catastrophically behind. Because that's what used to happen on the gold standard.
 

Iracundus

New Member
Registered Member
Um no, they should. In fact, the monetary base should expand ahead of the economy so as to not constrain it, same as the other way around.



Gold Standard =/= Monetary base not growing.

So no, the monetary did in fact expand. In fact, Rome's greatest period of Pax Romana saw exactly that happen. A steady and controlled expansion of monetary stock. Go back, and look at history, every massive economic expansion resulted in a similar expansion of the money supply.

The critique is that the money base expands only to the extent that there is actual availability of the metal. That of course is also simultaneously its benefit as it means governments cannot just expand the money supply at a whim, but the flip side is that the money supply is then subject to outside supply/demand forces and not necessarily based on what the economy might need or what the government might want.

A historical example is the Ming dynasty. Previously taxes had been levied in a range of commodities such as grain, cloth, and labor. Tax reform simplified things into having all taxes paid in silver instead. This on one hand provided some stability as then things depended only on one commodity's price and it meant abolishment of the hated labor tax obligation. China's economic size and lack of interest in trade in other products from other parts of the world led to worldwide silver flowing into China as silver was just about the only thing foreigners had that China wanted. However when due to various other historical events the flow of silver was slowed or stopped, this raised the price of silver within China. This in turn caused economic hardship as the money supply was then constrained. Peasants had to trade their produce for silver to pay their taxes, so a rise in the price of silver effectively meant a tax hike. Some have even suggested the domino effect of this ultimately led to the fall of the Ming dynasty.

My point is that money based on a commodity or having the commodity itself as money has a mixture of both good and bad points, and sometimes the downstream effects may be hard to predict.
 

Sinnavuuty

Senior Member
Registered Member
Um no, they should. In fact, the monetary base should expand ahead of the economy so as to not constrain it, same as the other way around.
At the time of the Roman Empire, they were not under a gold standard. What you are saying doesn't make any sense. Furthermore, one of the causes for the fall of the Roman Empire was precisely the fact that they reduced the value of the coins to support military and public spending, which was extremely high, one of the causes that many historians believe was fundamental to the fall of Rome. .

Your initial mistake is to start calling the phenomenon of deflation a bad thing. You are missing the point.

Calling the phenomenon of price reduction "deflation" is one of the most serious mistakes a person can make in economic science. It is the equivalent of confusing getting rich with getting poor. This error leads people to believe that an increase in the production of goods and services -- something that, in itself, is the basis of enrichment, but which also causes a fall in prices -- is at the same time the cause of a economic contraction and the impoverishment it generates.

To correctly understand the point, it is necessary to clarify a few things.

Prices can fall either as a result of greater supply (i.e., more goods and services being produced and sold) or as a result of lower demand (i.e., less money in existence and/or less spending on purchasing of goods and services).

In other words, there are two distinct causes for a generalized drop in prices. One is the increase in production and supply, something that should never, in any way, be confused with deflation, depression or impoverishment. The other is a decrease in the amount of money and/or the volume of spending in the economic system. A decrease in prices is the only effect they have in common. They differ profoundly in relation to their other effects.

The term deflation is closely associated with the phenomenon of falling business profits and the sudden and substantially greater difficulty in paying off debts, the direct consequence of which is the spread of insolvency and bankruptcies. Falling profits and a sharp and sudden increase in debt burden are, of course, the main symptoms of depression.

A depression, it is worth emphasizing, is characterized not only by a fall in prices, but also by a sharp reduction in profits (which may even become negative in the aggregate) and a sharp increase in the difficulties in repaying debts. Mass unemployment is also an unequivocal characteristic of a depression.

Because of a great lack of economic knowledge, the immediate causes of prosperity -- namely, increases in production and supply -- come to be seen as generating depressions and the widespread impoverishment that accompanies depressions.

Right from the start, the essential thing to understand is that a drop in prices resulting from an increase in production does not generate reductions in the general average rate of profits in the economic system, and does not make paying off debts more difficult. Furthermore: if the price reduction occurs in an environment in which there is an increase in the quantity of money and an increase in the volume of spending -- such that such price reduction is merely a result of the fact that the increase in production and of supply was greater than the increase in the amount of money and spending --, so this price reduction will be accompanied by an increase in the rate of profits and greater ease in paying off debts.

This would be exactly the scenario under a gold standard, as the supply of gold grows modestly from one year to the next as a result of continued and expanded mining, and the volume of spending in terms of gold grows proportionately. Under these circumstances, an ordinary seller would be in a position to sell his goods at lower prices and, at the same time, at a higher volume.

For example, if the price reduction arises from the fact that the amount of money and spending volume is increasing at an annual rate of 2% while the production and supply of goods are increasing at an annual rate of 3%, so a seller in this economic system will be able to sell 3% more goods at just 1% lower prices. Thus, your sales revenue will be 2% higher, and that is what matters for your nominal profits and your ability to pay off debts. Your profits will be greater and your ability to pay off debts, too. There was a fall in prices, but by no means was there deflation.

What actually destroys profits and makes it difficult to pay off debts is not a drop in prices, but a monetary contraction -- that is, a reduction in the amount of money and/or the volume of spending in the economic system. This is what causes a reduction in sales revenue. Furthermore: as costs are determined based on expenses incurred in a previous period of time, monetary contraction causes a corresponding reduction in profits. It is this contraction that also makes paying off debts more difficult: as there is now less money available in the economy, it becomes more difficult to obtain the same nominal amount needed to be used to pay off debts. It is monetary contraction, and monetary contraction only, that should be called deflation.

While a gold standard definitely can and probably will generate a drop in prices, it does not generate a drop in profits, nor greater difficulty in repaying debts or mass unemployment. The conjunction of these last three situations with the phenomenon of falling prices is the result of a decrease in the amount of money and the volume of spending. A reduction in the amount of money and the volume of spending is the result not of a gold standard, but of incomplete adoption of a gold standard. It is the result of a gold standard operating under a fractional reserve banking system, in which gold represents only a fraction of the money supply, with the rest made up of fiduciary media (electronic money or monetary certificates for which there is no corresponding backed by gold). In these circumstances, if economic agents default on their debts, this could cause a succession of bank failures, which will reduce the amount of money and the volume of spending in the economy.

Under a gold standard operating at 100% reserves -- that is, no fractional reserves -- gold will continue to be excavated at a rate greater than that at which it is physically lost -- for example, when a ship sinks or when the dead are buried with gold dental prosthetics. Consequently, the amount of money and volume of spending under a 100% gold standard will always be increasing. However, this will occur at a modest rate. Prices fall as the increase in production and supply of goods and services is greater than the increase in the amount of gold and spending.

As explained at the beginning, despite this drop in prices, the increase in the quantity of monetary gold and in spending means that, under a 100% gold standard, the average rate of profits of the entire economic system increases. This will occur for the simple reason that, in this scenario, the tendency is for there to be more money and more spending in the economy at the time the goods are sold than there was in the previous period of time, when the money was spent on the factors of production. of these goods. In other words: in time period t2 (when the goods are sold) there will be more money in the economy than in time period t1 (when the goods were produced). Consequently, the margin by which sales revenue exceeds production costs is correspondingly increased.

Furthermore, notwithstanding the corresponding fall in prices caused by the more rapid increase in the production and supply of goods and services, the increase in the quantity of gold and the volume of expenditure in terms of gold makes debt repayment somewhat more difficult. easy. For example, suppose that sales revenues in the economic system are increasing at a rate of 2% -- because of increases in the supply of gold and the volume of spending -- but that prices are falling at a rate of 3%. , because the supply of goods and services increased by 5% in the year.
 

Sinnavuuty

Senior Member
Registered Member
At the time of the Roman Empire, they were not under a gold standard. What you are saying doesn't make any sense. Furthermore, one of the causes for the fall of the Roman Empire was precisely the fact that they reduced the value of the coins to support military and public spending, which was extremely high, one of the causes that many historians believe was fundamental to the fall of Rome. .
In this case, an ordinary seller will have 5% more goods to sell at only 3% lower prices. Your sales revenue will increase by 2%. He will be able to earn progressively increasing revenues, despite the drop in prices, as the increase in the supply of goods and services that he can sell is greater than the drop in their selling prices. This occurred because the economy's output was greater than the increase in money supply (gold) and spending.

The modest increase in the rate of profit resulting from an increase in the quantity of gold is the opposite of what occurs in a depression. The same is true for the greater ease (not greater difficulty) in paying off debts.

So, the truth is that a 100% gold standard, with its falling prices, is as big an enemy of deflation as it is of inflation.

Finally, in relation to mass unemployment: if there is deflation -- in the correct sense of the term, that is, a reduction in the amount of money and the volume of spending -- then a fall in prices, far from being the cause of deflation/depression, will be the solution. In such circumstances, a reduction in wages and prices is exactly what is needed to allow a reduced amount of money and spending to buy everything that a previously larger amount of money and spending could buy. If, for example, as occurred in the United States in 1929, there was originally $50 billion in wage spending employing 50 million workers at an average annual wage of $1,000, and now, because of deflation, there is only $40 billion in spending on 40 million workers, full employment could be restored if the average wage fell from $1,000 to $800 per year. In that case, $40 billion could employ as many workers as $50 billion did.

Believing that a drop in wages and prices -- something necessary to recover from a deflation like -- is in itself a deflation and, therefore, wanting to prevent this drop, as occurred during the Hoover government and the entire New Deal in the USA , is an attitude that will only perpetuate unemployment and depression.

Confusing concepts result in catastrophic consequences.

You used the example of the USA and its economic cycles to support the argument, but that doesn't make any sense. For example, in the USA:
1) State governments allowed, in the event of a crisis, banks to operate, grant and collect loans without having to redeem them in kind. In other words, banks had the privilege of operating without having to pay their obligations in gold.

2) Interstate bank branches were prohibited, something that, together with a poor transportation system, prevented banks from readily demanding that other more distant banks redeem their notes in gold.

These two factors were responsible for several crises that occurred in the United States in the 19th century. Because banks could operate with fractional reserves -- there were no legal restrictions on this -- the money supply could be constantly expanded.

But there is a big difference between this system and the current one: today, a central bank can simply print money and save those banks that granted too many loans and that, because of this, became too leveraged; At that time, without a central bank and with gold being the currency, it was simply impossible to create gold out of thin air and in sufficient quantity for banks to honor their commitments.

Thus, precisely because of the impossibility of creating gold in abundance -- as today the central bank can do with banknotes --, banks were much more cautious in their loans. Consequently, the expansion of the money supply through fractional reserves was much more contained.

And the result was that, from 1815 to 1913, there was price deflation in the USA. In other words, prices fell year after year -- something unimaginable nowadays. Something that cost US$100 in 1815 only cost US$65 in 1913. Average price inflation during this period was -0.43%. That is, every year, things became 0.43% cheaper. When you look at the post-Civil War period -- from 1865 to 1914 --, the values become even more extraordinary. Something that cost $100 in 1865 only cost $60 in 1913, which means there was an average annual deflation of 1% -- every year, things got 1% cheaper.

And this was the period, it is worth remembering, of the greatest economic expansion in American history -- something that today's economists would have difficulty explaining, since, for them, economic growth is only possible if there is inflation. Real GDP grew at an average of 3.7% per year, with recession only occurring in the years 1884, 1893-1894, 1896, 1904 and 1908, all of them caused by the fractional reserve system.

In short: there was economic growth and the monetary base (backed by gold) grew at negligible rates. Just to emphasize, banks had been practicing fractional reserves since that time, but they couldn't get too excited precisely because the monetary base was quite rigid. If they got too excited, they could easily become insolvent.

However, after the Panic of 1907 -- caused by some banks that were unable to fulfill their obligations to their account holders, precisely as a result of the monetary expansion they had carried out via fractional reserves --, several bankers decided that it was time to put an end to this market insecurity. It was time to create a lender of last resort, a powerful agency that would cartelize the sector, protecting it from this insecurity.

Thus, in December 1913 the Federal Reserve was born, an entity created by powerful people such as J.P. Morgan, John D. Rockefeller, Frank A. Vanderlip (president of the National City Bank of New York, associated with the Rockefellers), Henry Davison (principal partner of J.P. Morgan Company), Charles D. Norton (president of the First National Bank of New York), Colonel Edward House (who would later be President Woodrow Wilson's advisor and found the world-powerful Council on Foreign Relations, an obligatory presence in all theories of the conspiracy) and Paul Warburg (of the investment bank Kuhn, Loeb, & Co.)

Interestingly, all history books and all macroeconomics textbooks say that the Fed was created precisely to protect the interests of the poorest sections of the population. In fact, whenever something is created to benefit the establishment, the trick is to say that it is being done in the name of the poor -- this applies to everything: from state-owned companies to central banks, especially when it is created by bankers aiming for their own interests. The trick is applied worldwide and works well to this day.

What was the result of the creation of the American central bank? What happened to the American economy after the government took control of the currency? Did the dollar remain with the same purchasing power?

In 1920, there was the first post-Fed crisis, generated by the acceleration of monetary expansion. This was the last crisis in which a government did almost nothing to try to mitigate it -- which is exactly why its duration was short.

During the remainder of the 1920s, the money supply grew more rapidly again, culminating in the 1929 crisis.

In 1933, Roosevelt prohibited American citizens from redeeming their dollars in gold. Americans were even prohibited from owning any amount of gold at home or abroad. The dollar was devalued and became redeemable in gold only for foreign governments and central banks. Still, a small connection with gold was maintained.

In 1945, with the Bretton Woods agreement, the dollar became the standard world currency, although still linked to gold. With one detail: the dollar could not be redeemed in gold by American citizens; it could be redeemed in gold only to foreign governments and their central banks. No American individual could exchange dollars for gold. Only governments had this privilege. This arrangement, albeit tortuously, restricted the Fed somewhat, because if it inflated the dollar, foreign governments could exercise their right to exchange dollars for gold, causing a huge flight of gold from the US.

In 1971, however, precisely as a result of a large volume of gold outflow from the USA, Richard Nixon put an end to everything and definitively removed the USA from what was still left of the gold standard, defaulting on foreign governments and creating the paper system. -floating currencies that we currently know.
 

Sinnavuuty

Senior Member
Registered Member
In this case, an ordinary seller will have 5% more goods to sell at only 3% lower prices. Your sales revenue will increase by 2%. He will be able to earn progressively increasing revenues, despite the drop in prices, as the increase in the supply of goods and services that he can sell is greater than the drop in their selling prices. This occurred because the economy's output was greater than the increase in money supply (gold) and spending.
It is worth highlighting: the monetary arrangement under which we live has only existed since 1971. Many people think that the present arrangement is one that has always existed in the history of the world. Nothing more illusory. The current inherently unstable monetary system, which appears to be exhausting itself with the current American and European crisis, is not even 60 years old.

And what happened to the US after this complete break with the gold standard? Real GDP grew at an average of just 2.9% per year. In addition to the stagflation of the entire 1970s, the strong recession of 1981-1982, the recessions of 1990-1991, 2001-2003, and the depression that began in December 2007 and I won't even talk about the current scenario.

Take all the data and compare it from the consumer price index, producer price index, federal government budget deficit, federal government revenues (influenced by the expansion of the money supply), federal government spending, gross government debt federal among other economic aggregates.

As can be seen, the more power the government has over the currency, the greater the expansion of the money supply, the greater the price inflation imposed on citizens (which means that the greater the decrease in the purchasing power of the currency) and, mainly , the greater the capacity for expansion of the state machine – a characteristic that a gold standard is efficient in preventing.

As for inflation, in comparative terms, something that cost US$100 in 1913 cost US$2,230 in 2009, which means that US$1 dollar from 1913 is worth less than US$0.04 today. In other words: after the central bank was created precisely to stabilize the value of the currency, the dollar lost no less than more than 96% of its value.

On the other hand, during the entire period in which there was no central bank to "guarantee" its stability, the dollar gained 57% in purchasing power.
 

supersnoop

Major
Registered Member
Networth. And duo income. I finished my masters when I was 23 and had no debt. Wife had so many scholarships she came out from university with almost 100k.

And like manquiangrexiue, we are good at saving. Don't spend money on useless crap for 10 years like luxury shoes and bags goes a long way. Also we work in oil and gas during the boom years, so plenty of new grads make 100k+.

Believe it or not, luxury crap retains its value surprisingly well. I'm not recommending going out and splurging on luxury goods, but as an example, I was able to purchase several Canada Goose Jackets on sale at a hunting store (before they became super popular and sold at high end boutiques only), then resold them a few years later for $500 profit each even though it was used (Maybe take out $50-$100 each for Dry Cleaning).

Luxury goods makers are really great at manipulating the market, so you can take advantage of it too if you know what you're doing. Handbags, buy a certain colour, suddenly it becomes "vintage", guess what? People online will pay a lot for it as long as it's in good condition. If you are really crazy about arbitrage, you can even sell boxes and shopping bags for $20-$50 USD each. Don't underestimate people's desire to keep up appearances, lol.
 
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