The Economic Ignorance of the Modern Right

[dre]

A gold backed system is an illusion depends on the fact that most people never ask for the gold. If a lot of people did you would find that the promise would NOT be honoured. This reality is why it was illegal to hold gold. What good is a promise to pay in gold if it is illegal to hold the gold that you would get? Bottom line: there is no effective difference between a formal "fiat" currency system and a system where government makes promises it has no intention of keeping.

All fractional banking is based on that illusion no matter what the tokens are.

[dre]

That's a good point.

So much of this reminds me of the 'Free Silver' discussions from the 19th century. The fact that you have people from the left and right supporting this makes you kind of scratch your head and wonder.

I dont think theres all that many people that support precious metal standards. People just see all the problems inherent with the debt money system (business cycle, wealth concentration, etc etc) and want something different. Going back to the gold standard is not a "decision" we are ever going to make, the only way that would happen is if the current system fell apart and people had no other choice.

THen again the central banks themselves apparently still see gold as money because most of them are increasing their reserves.

As a first step I would be happy to just separate banking from money creation, then deregulate banking completely. This wouldnt really be too hard to do, except that banks would use every manner of coersion and violence imaginable to try to stop it.

Edited November 15, 2012 by dre

[cybercoma]

I dont think theres all that many people that support precious metal standards.

Because it's extremely difficult to control the supply of money and therefore inflation.

[dre]

Because it's extremely difficult to control the supply of money and therefore inflation.

Yeah thats essential correct although the real problem with a precious metal standard is deflation.

[cybercoma]

Yeah thats essential correct although the real problem with a precious metal standard is deflation.

Yeah. The flipside being deflation. I figured that was assumed when talking about inflation.

[blueblood]

Yeah thats essential correct although the real problem with a precious metal standard is deflation.

And like inflation has a dark side and light side

[Pliny]

A gold backed system is an illusion depends on the fact that most people never ask for the gold. If a lot of people did you would find that the promise would NOT be honoured. This reality is why it was illegal to hold gold. What good is a promise to pay in gold if it is illegal to hold the gold that you would get? Bottom line: there is no effective difference between a formal "fiat" currency system and a system where government makes promises it has no intention of keeping.

FDR made it illegal to hold gold to prevent "hoarding". Today's program of economic stimulus serves the same purpose in that it is designed to get people spending and jump start the economy.

What good is a promise to pay in gold if it is illegal to hold the gold that you would get?

The dollar bills all still had a promise to pay the denomination in gold or silver. Just a temporary measure like income tax, you know. It was the patriotic thing to do.

Bottom line: there is no effective difference between a formal "fiat" currency system and a system where government makes promises it has no intention of keeping.

It originally intended to keep its promise but things like war and depressions happen, you know, emergencies. Nyuk Nyuk.

The good points about a commodity form of money are that it is a natural restraint on government spending, they can't manipulate the economy and most of the money is held by the general populace which gives them a little more power over government than just a simple vote. Currencies are a different story than money itself. A currency can be made from money if the commodity serving as money is portable, divisible and facilitates trade but mostly it is in a form as a promise to pay, such as a deposit note from a bank, a cheque or an IOU, they are all money substitutes and contain a promise to pay in money. The government in taking over responsibility to print a currency originally includes that promise to pay on its money. But as you say, people begin to not ask for the "money" so it stays deposited and over time in the common usage of the terms the currency begins to be called the money itself - if the government is promising to pay it was considered "as good as gold" and just the currency is in circulation. Banking practices however contributed to the creation of currency in excess of deposits, such as a loan, a practice known as "fractional reserve banking". It does act as a source of inflation. But it is considered legitimate. The creation of a central bank was to prevent bank failures due to runs on banks that had issued notes in excess of their deposits and when people got scared about the stability of a particular bank or there were some economic stresses and people needed their money the bank would appeal to the central bank which would supply it with the necessary deposits to cover the withdrawals essentially keeping its promise to pay. That's the idea. But as you know emergencies occur and deposits have to be used for other things but you are supposed to eventually be able to redeem your paper IOUs. Then... well, does it really matter since the IOUs seem to be serving the purpose and you haven't needed your deposit of money. Society basically winds up with a paper fiat token as a currency. What you have lost is real money in savings and government has usurped a little more power over society. The only power the individuals have besides their vote is gone never to return because economists and people like yourself and Michael Hardner see no big deal. But money as a commmodity has a market value as well as value as money. So it is never worthless and the individual who holds some in the form of savings can ride out most economic downturns but a fiat token currency can be worthless tomorrow and no one easily rides out of that.

[Pliny]

Yeah thats essential correct although the real problem with a precious metal standard is deflation.

There are some drawbacks to deflation but most of them adversely affect government.

Deflation lowers prices and wages but if prices are lower wages don't suffer any loss of purchasing power if they too are lower. So that would be a wash. The angst is in the constant downward adjustment. With inflation everyone will agree easily to an upward adjustment, to wages at least. They don't like prices to

I dont think theres all that many people that support precious metal standards. People just see all the problems inherent with the debt money system (business cycle, wealth concentration, etc etc) and want something different. Going back to the gold standard is not a "decision" we are ever going to make, the only way that would happen is if the current system fell apart and people had no other choice.

THen again the central banks themselves apparently still see gold as money because most of them are increasing their reserves.

As a first step I would be happy to just separate banking from money creation, then deregulate banking completely. This wouldnt really be too hard to do, except that banks would use every manner of coersion and violence imaginable to try to stop it.

go up too fast.

Government faced with dreaded deflation cannot increase its budget and suffers tax revenue losses because of lower prices and wages. It doesn't like to contract and always likes to expand. It works to maintain inflation at a low rate but emergencies happen.....????

Unions will not agree to lower wages. Big problem there.

[dre]

here are some drawbacks to deflation but most of them adversely affect government.

No deflation adversely effects the entire economy and everyone in it and it destroys economic growth. The reason price stability is important is because otherwise individuals are less likely to enter into contracts with each other. I would not sign a 1 year contract with an employee in a deflationary environment for the same reason an employee would not sign a 1 year contract with ME in an inflationary environment.

This is one of the great libertarian myths... That somhow deflation is better than inflation. But you cant possibly believe that unless you dont understand the fundamental purpose of currency.

[blueblood]

It's not a myth, it's a trade off. Less available money means prices fall for everything. You may earn less, but your goods also cost less.

[Pliny]

As a first step I would be happy to just separate banking from money creation, then deregulate banking completely. This wouldnt really be too hard to do, except that banks would use every manner of coersion and violence imaginable to try to stop it.

Banks would simply have to revert back to their origin which lies in the safe storage of people's money. Not a lucrative business really, they would have to have an investment arm and share investment returns (and losses) with their depositors.

[Pliny]

No deflation adversely effects the entire economy and everyone in it and it destroys economic growth. The reason price stability is important is because otherwise individuals are less likely to enter into contracts with each other. I would not sign a 1 year contract with an employee in a deflationary environment for the same reason an employee would not sign a 1 year contract with ME in an inflationary environment.

This is one of the great libertarian myths... That somhow deflation is better than inflation. But you cant possibly believe that unless you dont understand the fundamental purpose of currency.

It is an inflationary environment and people still sign contracts usually with inflation written in. Deflation will not destroy economic growth. it just has to be understood the same way inflation is. One of the biggest complaints about "Capitalism" is that it is about materialistic consumption and exponential and unsustainable growth. Econometrists and Governments warn about deflation and worry about it and their entire monetary manipulation is about price stability. I know you hold the view of most mainstream or leftist type economists who agree with government's tinkering in the economy. But if wage and price stability were something that was as important as they think why doesn't the government just impose outright wage and price controls instead of inflating the currency supply to accomplish that? They don't want price stability as much as they want government growth in its revenues and budgets.

Will demand for housing, food and goods and services disappear under deflation? No, is the correct answer. In a deflationary environment money will not have a tendency to be mal-invested, where frivolity and consumerism run rampant. There will be stable and real growth - not the up and down boom-bust cycle we go through now. Under deflation you may miss those boom periods but they all result in the bust period.

So libertarians do not understand the fundamental purpose of currency? That is big news. Especially when there is a zero differentiation between money and currency among most economists today. Most think that in the past money has just been about digging it out of the ground in one place and burying it in another, a la Milton Friedman, or TimG, so we can just dispense with that futile exercise and create "money" at will.

You know, Rome lasted about 4 centuries as an Empire. It gradually started to deteriorate, and coincident with that deterioration it started to debase its money by alloying it with baser metals thus increasing or inflating the coinage. In its final stages after attempting to quell discontent by offering the citizens bread and circuses which worked for a while but failed to revive the Empire it introduced price controls to keep the price of grains down. That didn't work either though. The intent of those price controls was to aid the poor so they could afford to buy bread but the result was there was no bread available. Grain production dropped as there was no profit in it or it moved to markets where there was a profit. We seem to be following the same route today in thinking government will fix the economy. Mostly though politicians will buy votes with entitlements and "rights" - the bread and circuses era. We have already destroyed our money so it'll be a quick drop to the bottom of the barrel and tyranny - for our own good of course.

[dre]

It is an inflationary environment and people still sign contracts usually with inflation written in.

Sure, people made deals even under the barter system.Currency is an economic lubricant though thats supposed to make transactions easier, and its most effective if the value is stable and predictable. A worker isnt going to agree to a yearly salary unless he has a pretty good idea of how much purchasing power hes going to get in return for his labor.

Will demand for housing, food and goods and services disappear under deflation?

No again deman for goods and services existed even under the barter system. The purpose of currency is to optimize the ammount voluntary transactions by making them easy.

Deflation will not destroy economic growth.

It absolutely will and its happened before. Deflation discourages transactions because when prices are falling people are less willing to buy things and less willing to borrow money. Just sitting on your cash becomes an investment.

[Pliny]

Sure, people made deals even under the barter system.Currency is an economic lubricant though thats supposed to make transactions easier, and its most effective if the value is stable and predictable. A worker isnt going to agree to a yearly salary unless he has a pretty good idea of how much purchasing power hes going to get in return for his labor.

Under deflation the worker increases his purchasing power over the year on a yearly contract and under inflation he loses. The employer loses under deflation and wins under inflation.

No again deman for goods and services existed even under the barter system. The purpose of currency is to optimize the ammount voluntary transactions by making them easy.

It absolutely will and its happened before. Deflation discourages transactions because when prices are falling people are less willing to buy things and less willing to borrow money. Just sitting on your cash becomes an investment.

Apparently then, Economic growth will not occur but demand for goods and services will still exist. Rather contradictory isn't it?

By the way, currency does facilitate trade but a currency of token value is only half a trade. The person receiving a paper currency in trade is only getting a future claim on goods and services solely guaranteed by government fiat. Something equivalent to a token that may expire tomorrow. You better hope government sticks around and isn't subverted by granting entitlements to an underclass and seizing your tokens, thus violating their guarantee to you from them. Or some other governing body overrides your nation's sovereignty. Or some tyrant trashes your Constitution or it is eroded over time. Or there is revolution in the streets. Or government destroys your tokens by issuing too many. Or decrees your tokens invalid.

Essentially, government has empowered itself by eroding the connection of the commodity that the populace owned and determined their wealth from. You can see that government has quite a bit of control over its populace through the economy under a fiat currency system that has no commodity backing.

When a currency is backed by a commodity, whatever it may be, and the commodity remains in the hands of the populace government has little power over the populace it is only by destroying the connection of the currency to the commodity that it empowers itself. The fiat currencies of the world have of course been detached from any commodity backing over the course of modern history and that has served to empower it. Previous to that people owned the commodity that was backed by their currency and since it was the commodity that provided the guarantee of future claims on goods and services there was only inflation, deflation and theft to worry about in affecting your purchasing power. You didn't have to worry about the whimsical needs and wants of your government or those demands of the population of its government or any of the ill effects upon the economy that manipulation of the currency including its supply, the interest rate, etc.will cause.

Again it is apparent that the population's general welfare is given entirely over to the power of government under a fiat currency system and society has little input to its evolutionary development.

[dre]

Under deflation the worker increases his purchasing power over the year on a yearly contract and under inflation he loses. The employer loses under deflation and wins under inflation.

Apparently then, Economic growth will not occur but demand for goods and services will still exist. Rather contradictory isn't it?

By the way, currency does facilitate trade but a currency of token value is only half a trade. The person receiving a paper currency in trade is only getting a future claim on goods and services solely guaranteed by government fiat. Something equivalent to a token that may expire tomorrow. You better hope government sticks around and isn't subverted by granting entitlements to an underclass and seizing your tokens, thus violating their guarantee to you from them. Or some other governing body overrides your nation's sovereignty. Or some tyrant trashes your Constitution or it is eroded over time. Or there is revolution in the streets. Or government destroys your tokens by issuing too many. Or decrees your tokens invalid.

Essentially, government has empowered itself by eroding the connection of the commodity that the populace owned and determined their wealth from. You can see that government has quite a bit of control over its populace through the economy under a fiat currency system that has no commodity backing.

When a currency is backed by a commodity, whatever it may be, and the commodity remains in the hands of the populace government has little power over the populace it is only by destroying the connection of the currency to the commodity that it empowers itself. The fiat currencies of the world have of course been detached from any commodity backing over the course of modern history and that has served to empower it. Previous to that people owned the commodity that was backed by their currency and since it was the commodity that provided the guarantee of future claims on goods and services there was only inflation, deflation and theft to worry about in affecting your purchasing power. You didn't have to worry about the whimsical needs and wants of your government or those demands of the population of its government or any of the ill effects upon the economy that manipulation of the currency including its supply, the interest rate, etc.will cause.

Again it is apparent that the population's general welfare is given entirely over to the power of government under a fiat currency system and society has little input to its evolutionary development.

Apparently then, Economic growth will not occur but demand for goods and services will still exist. Rather contradictory isn't it?

Nope not at all.

By the way, currency does facilitate trade but a currency of token value is only half a trade. The person receiving a paper currency in trade is only getting a future claim on goods and services solely guaranteed by government fiat. Something equivalent to a token that may expire tomorrow. You better hope government sticks around and isn't subverted by granting entitlements to an underclass and seizing your tokens, thus violating their guarantee to you from them. Or some other governing body overrides your nation's sovereignty. Or some tyrant trashes your Constitution or it is eroded over time. Or there is revolution in the streets. Or government destroys your tokens by issuing too many. Or decrees your tokens invalid.

None of this is solved by the gold standard. The king used to send tax collectors to take your gold, and then he could do whatever he wanted with it.

You can see that government has quite a bit of control over its populace through the economy under a fiat currency system that has no commodity backing.

Governments throughout the history of gold money had even more. I do have some real problems with the current monetary system, mostly around how money enters the economy, but people world wide have more power now than they ever have before. They also have better lives.

Under deflation the worker increases his purchasing power over the year on a yearly contract and under inflation he loses. The employer loses under deflation and wins under inflation.

Yeah and in both cases thats a big problem. Nobody will hire workers in a deflationary environment, in fact theres little reason to start any enterprise at all. If your money is quickly gaining value the smartest thing to do is just sit on it.

[August1991]

This thread has been hijacked but as the poster of its OP, I feel obliged to attempt to bring it back on track.

As I posted above:

When Steyn and his ilk argue that Obama's re-election is the end of America as we know it, I'd ask Steyn: "Where is the inflation?"

If I were a Leftist in America, this is the question that I would ask of the American Right: "Where is the inflation?"

Or here's another question, "What are interest rates on 30 year US Treasury bonds?"

----

Unlike the Left, the Right trusts in free markets. Well, here's a case where the free market is saying something that supports the Leftist viewpoint. And the free market is saying that the Right is wrong.

Edited November 19, 2012 by August1991

[dre]

This thread has been hijacked but as the poster of its OP, I feel obliged to attempt to bring it back on track.

As I posted above:

If I were a Leftist in America, this is the question that I would ask of the American Right: "Where is the inflation?"

Or here's another question, "What are interest rates on 30 year US Treasury bonds?"

----

Unlike the Left, the Right trusts in free markets. Well, here's a case where the free market is saying something that supports the Leftist viewpoint. And the free market is saying that the Right is wrong.

First of all in the west both the right and the left promote mixed economies... they both promote government intervention in the economy just to different degrees in a different ways.

Second of all theres plenty of inflation...

Energy

Fresh meat and produce

Medical careD

ental care

College tuition

Now part of the reason people think theres less inflation than their really is is because they changed the way core CPI is calculated and removed energy and food. This makes the numbers look a little nicer, but the problem is those are two important and large expenses for the average family.

Its also been explained to why inflation hasnt gotten a lot worse than it has. A lot of the US money supply is not in the economy... its in other economies... Like the 16 TRILLION dollars wisked off to banks around the world by the federal reserve.

Edited November 19, 2012 by dre

[August1991]

Second of all theres plenty of inflation...

Energy

Fresh meat and produce

Medical careD

ental care

College tuition

Now part of the reason people think theres less inflation than their really is is because they changed the way core CPI is calculated and removed energy and food. This makes the numbers look a little nicer, but the problem is those are two important and large expenses for the average family.

By several measures (google, BEA), US inflation is non-existent or below 2%.

-----

Dre, if you really believe that inflation is/will be a problem, short some long term bonds. Or buy some real-interest paper.

As I argue above, on this economic point, free markets have said for several years now that the Modern Right is wrong. The price of 30 year US treasuries has not fallen, and the price of TIPs has not changed.

Link

Its also been explained to why inflation hasnt gotten a lot worse than it has. A lot of the US money supply is not in the economy... its in other economies... Like the 16 TRILLION dollars wisked off to banks around the world by the federal reserve.

Admittedly, someone is holding the US money.

If it is foreigners (as you argue), and they abandon the US dollar, it may be a good thing for America. If foreigners abandon the US dollar, then the US dollar may soon fall, making America cheap to the world.

Dre, have you considered the possibility of the collapse of the foreign price of a US dollar? Imagine if we Canadians could buy a litre of Florida orange juice for only 50 cents Canadian!

Edited November 19, 2012 by August1991

[dre]

By several measures (google, BEA), US inflation is non-existent or below 2%.

-----

Dre, if you really believe that inflation is/will be a problem, short some long term bonds. Or buy some real-interest paper.

As I argue above, on this economic point, free markets have said for several years now that the Modern Right is wrong. The price of 30 year US treasuries has not fallen, and the price of TIPs has not changed.

Link

Admittedly, someone is holding the US money.

If it is foreigners (as you argue), and they abandon the US dollar, it may be a good thing for America. If foreigners abandon the US dollar, then the US dollar may soon fall, making America cheap to the world.

Dre, if you really believe that inflation is/will be a problem, short some long term bonds.

Like I tried to explain before inflation is a personal phenomenon. If you spend most of your money on energy, food, medical care, and college tuition then you are already getting your ass kicked. This is why a lot of people feel so squeezed. If you are a higher income household that spends a lot of money on consumer electronics and other non durables then inflation is manageable.

As I argue above, on this economic point, free markets have said for several years now that the Modern Right is wrong. The price of 30 year US treasuries has not fallen, and the price of TIPs has not changed.

The reason for this is that pacific rim and oil exporting nations depend on American consumers for their livelyhood so they are desperately scrambling to prop up the green back. These are the countries buying all those treasuries instruments, and the reason they do it is because if the US dollar falls too much Americans will no longer be able to afford their exports. All these countries are sitting on huge piles of US dollars which helps keep inflation in check. And just about every other country has some US dollar reserves.

This will go on for quite some time in my opinion. Another 10 or even 20 years. The bond market is not going to dry up until other major consumer markets emerge. But that does not mean that people who forcast inflation as a result of monetary expansion are wrong... in fact that theory is absolutely correct and sound.

[Pliny]

But that does not mean that people who forcast inflation as a result of monetary expansion are wrong... in fact that theory is absolutely correct and sound.

You have to understand that one fact above, August. For various reasons, some of which dre points out, you don't seem to see the symptoms in the economy, they are there and will only worsen over time as the money seeps into the economy and if QE3 continues it will be sooner than later. Those on fixed incomes are feeling some pain if just from government services alone. Tolls on bridges, fees at the Doctors office, higher property taxes, very low and sustained interest rates, let alone the price of necessary commodities..

I only disagree with dre on one point and that is his 10 or 20 year time frame. I think it will be a lot sooner because once the damn bursts it'll be hard to check it. The damage to the economy is done. We just have to wait for the tsunami to hit.

[Pliny]

Yeah and in both cases thats a big problem. Nobody will hire workers in a deflationary environment, in fact theres little reason to start any enterprise at all. If your money is quickly gaining value the smartest thing to do is just sit on it.

During a depression yes. That is why hoarders were so despised in the depression. FDR tried to get people spending. If he would have left it people would eventually be starting enterprises but FDR decided to take away their savings.

As to having a better life that is temporary under this economic structure. They have to suffer wars and depressions and an inevitable economic collapse and who knows what will come out of the rubble.

[August1991]

Like I tried to explain before inflation is a personal phenomenon. If you spend most of your money on energy, food, medical care, and college tuition then you are already getting your ass kicked. This is why a lot of people feel so squeezed. If you are a higher income household that spends a lot of money on consumer electronics and other non durables then inflation is manageable.

If I understand, you argue that inflation is a problem but the CPI doesn't measure it. As I say, forget the CPI. Look at nominal interest rates on long term paper.

The reason for this is that pacific rim and oil exporting nations depend on American consumers for their livelyhood so they are desperately scrambling to prop up the green back. These are the countries buying all those treasuries instruments, and the reason they do it is because if the US dollar falls too much Americans will no longer be able to afford their exports.

That sounds like a conspiracy theory. Do people in the Pacific Rim and Oil Exporting Nations meet some place and decide to buy US dollars? (No one cheats and sells it short?)

Anyway, if your "foreigners-buying-dollar-instruments" theory proves true, and the foreigners eventually abandon the dollar, it would be a good thing for the US economy. Florida orange juice would be cheap.

This will go on for quite some time in my opinion. Another 10 or even 20 years. The bond market is not going to dry up until other major consumer markets emerge. But that does not mean that people who forcast inflation as a result of monetary expansion are wrong... in fact that theory is absolutely correct and sound.

10 or even 20 years? As John Maynard Keynes noted, when a ship is in the midst of a hurricane storm, what good is it to tell the ship captain that the ocean waters will eventually return to their calm, regular sea level?

In the short term (the past four years or so), there has been no inflation. Because of the Fed and Bernanke, the US has avoided a horrendous depression/recession and double digit unemployment. Because of Keynes, Obama (and Stephen Harper) was re-elected.

The smart Modern Right has taken notice.

[August1991]

You have to understand that one fact above, August. For various reasons, some of which dre points out, you don't seem to see the symptoms in the economy, they are there and will only worsen over time as the money seeps into the economy and if QE3 continues it will be sooner than later. Those on fixed incomes are feeling some pain if just from government services alone. Tolls on bridges, fees at the Doctors office, higher property taxes, very low and sustained interest rates, let alone the price of necessary commodities.

Pliny, don't confuse the macro Keynesian policies with the myriad micro policies (of big government) which have for effect to make life more miserable and difficult.

I only disagree with dre on one point and that is his 10 or 20 year time frame. I think it will be a lot sooner because once the damn bursts it'll be hard to check it. The damage to the economy is done. We just have to wait for the tsunami to hit.

Dam burst? Tsunami?

People rarely use such words to describe the recovery from a hangover.

-----

Here's a thought for you two (and others). It makes sense to take penicillin when you have an infection; but penicillin won't make you stronger when you are healthy.

Printing and spending money when an economy is doing well is a recipe for disaster. But when an economy is sick, it makes perfect sense.

Edited November 23, 2012 by August1991

[dre]

That sounds like a conspiracy theory. Do people in the Pacific Rim and Oil Exporting Nations meet some place and decide to buy US dollars? (No one cheats and sells it short?)

Anyway, if your "foreigners-buying-dollar-instruments" theory proves true, and the foreigners eventually abandon the dollar, it would be a good thing for the US economy. Florida orange juice would be cheap.

Its not conpiracy theory at all. Its public knowledge what is happening and where all that paper is going and why.

Take China for example... In a free market huge trade imbalances like the one China enjoys with the US could not happen for long because the value of the yuan would go up relative to the value of the US dollar until it was cheaper for the US to just make all these goods itself or buy them elsewhere.

To avoid this natural exchange rate correction heres what China does... They CONSTANTLY print yuan and use it to buy US dollars, and US debt. By flooding the market with yuan they are able to avoid increase in currency value normally associated with strong industrial production, and the increased demand for US dollars and paper raises the relative value of the US dollar.

If I understand, you argue that inflation is a problem but the CPI doesn't measure it. As I say, forget the CPI. Look at nominal interest rates on long term paper.

THe rates on long term paper are what they are for the reason I mentioned above. Theres strong demand for it among countries that run a large trade surplus with the US.

Anyway, if your "foreigners-buying-dollar-instruments" theory proves true, and the foreigners eventually abandon the dollar, it would be a good thing for the US economy. Florida orange juice would be cheap.

Its not a theory, its a description well known and and well understood events that take place in reality.

Would it be a good thing for the economy? Its hard to say... a rapid devaluation of the dollar would really screw things up in the short term. A fairly recent example of this happening is Argentina... When the peso imploded foreign investors fled the country and the economy crashed. People fell back on all kinds of barter networks to trade goods and services, but those networks collapsed under the weight. The government made it illegal to take money out of your own bank account for a year or two to try to drive the value of the peso back up, and there was riots and all kind of political turmoil.

BUT... in the long term it was probably a good thing. The low peso drastically reduced the ammount of imports, and made Argentinas exports more competitive. Businesses sprang up making all the things they used to import. After about 6 or 7 years they emerged as a stronger economy.

Edited November 23, 2012 by dre

[dre]

Here's a thought for you two (and others). It makes sense to take penicillin when you have an infection; but penicillin won't make you stronger when you are healthy.

Printing and spending money when an economy is doing well is a recipe for disaster. But when an economy is sick, it makes perfect sense.

The problem is that taking penicillin gets rid of infection... but it doesnt CAUSE the next infection.

And thats exactly what the overly liberal use of monetary easing does. Sure, it lessens the severity of a recession and aids in the recovery, but it also guarantees another even larger recession in the future. For example, all the easy credit that they used to fix the economy after the .COM bubble burst, was used to inflate the realestate bubble leading the 2007 meltdown.