Does *fiat money* leads to controlled devaluation of money?

Discussion in 'Economy' started by maciejso, Nov 15, 2011.

  1. maciejso
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    maciejso Rookie

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    I have a few questions regarding the inflation and fiat money. All of them are so related that I decided to bind them in one question.

    Why do we allow for fiat money?
    Is inflation really a perfect tax?
    Who benefits on inflation and who loses?
    If, hypothetically, our financial systems with fiat money came (somehow) to money backed up in gold would that solve the problem of inflation?
     
  2. Dragon
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    Dragon Senior Member

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    Because in a world where economic productivity is growing faster than the supply of a stable commodity such as gold, commodity money cannot allow the money supply to grow and keep pace with production. This leads to severe monetary problems.

    No.

    Borrowers benefit at the expense of lenders, although lenders adjust interest rates to compensate so this is really not true.

    Well, I disagree that inflation is a "problem." What a gold standard would do would be to plunge us into ruinous DEflation.
     
  3. Brutus
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    Brutus Senior Member

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    Nathan Lewis:
    If a gold standard causes contraction and decline, how did that happen? Obviously it is baloney. After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.
     
  4. expat_panama
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    expat_panama Silver Member

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    America became a world power after dumping gold, not before.
     
  5. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    I think the US has been a world power since WWI. Some say before that even.
     
  6. william the wie
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    william the wie Gold Member

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    Quite right the neo-classical economic model is based on the normal curve distribution and if that were true inflation would make sense.

    The actual distribution of economic outcomes is exponential but goodness of fit is 97%, which sounds almost perfect but is anything but. "The (Mis)behavior of Markets" by Mandelbrot is kind of rough but it is the most accessible explanation of what's wrong with economic math.

    Then there is the neurological problem. Discounting is run through specialized neurological circuit(s) and it appears to be the same neurological circuit(s) in birds and rats as humans. But it is not just money or real goods that get discounted but also social and genetic relationships that get discounted. Dan Ariley has shown the corrosive effect of monetizing social relationships through inflation.

    Inflation looks good, sounds good, works in normal curve models and is a disaster waiting for a place to happen in reality.
     
  7. konradv
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    konradv Gold Member

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    It would probably lead to deflation, an even more devastating scenario than inflation. If money were to be completely backed by gold, there wouldn't be much to go around. Any money held would be worth much more than it is today. Wages would plummet and anyone with fixed debt would be underwater quickly. Fiat money does lead to inflation, but if currency availability is monitored properly, a slow rise doesn't lead to the same sort of devastation as deflation and those with fixed debt will do better over time.
     
  8. Brutus
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    Brutus Senior Member

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    the USA had tremendous growth from day one while it was on a gold standard. Case closed.

    In any case the government runs the gold standard or a central bank so neither will work if the government doesn't believe in stable prices.

    And, the debate is sort of stupid anyway since no one thinks we can get rid of our central bank. The BBA on the other hand is a realistic way to neuter liberal central government.
     
    Last edited: Nov 16, 2011
  9. Dragon
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    Dragon Senior Member

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    You need to explain this a little better -- and a little more coherently. You aren't presenting any of the stupidly simplistic arguments, at least, like "What happens when the value of the money drops to ZERO!!!"

    I don't want to say anything in response to the ones you are presenting until I understand them better. So please do elaborate, if you would.
     
  10. expat_panama
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    expat_panama Silver Member

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    The point we're working with here is how a gold standard relates to America's commanding role. There's no way around the fact that the era with the Federal Reserve has the US far more powerful than the one before.
     

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