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

[maciejso]

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?

 

[Dragon]

Why do we allow for fiat money?

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.

Is inflation really a perfect tax?

No.

Who benefits on inflation and who loses?

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

If, hypothetically, our financial systems with fiat money came (somehow) to money backed up in gold would that solve the problem of inflation?

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

 

[Brutus]

What a gold standard would do would be to plunge us into ruinous DEflation.

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.

 

[expat_panama]

...After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.

America became a world power after dumping gold, not before.

 

[Wiseacre]

...After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

 

[william the wie]

...After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

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.

 

[konradv]

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?

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.

 

[Brutus]

...After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

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.

 

[Dragon]

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

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.

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.

 

[expat_panama]

...After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

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.

 

[Toro]

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?

Because hard money isn't responsive to the ebbs and flows of the economy.

Is inflation really a perfect tax?

No. It is the worst tax because it is hidden and taxes savers.

Who benefits on inflation and who loses?

Borrowers and owners of real assets benefit from inflation. Lenders and those living on fixed incomes are losers from inflation.

If, hypothetically, our financial systems with fiat money came (somehow) to money backed up in gold would that solve the problem of inflation?

Probably. But we don't have a price inflation problem. At least not right now.

 

[Toro]

America became a world power after dumping gold, not before.

I think the US has been a world power since WWI. Some say before that even.

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.

This is absolutely correct. The US benefits enormously from the dollar being the reserve currency.

Or at least it had. Whether or not it will in the future is an open question. The perils of using fiat currency may outstrip the benefits.

 

[william the wie]

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

A normal distribution looks like a bell when it is graphed.

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.

Exponential curves graph out as a lop sided bell curve. Black and Sholes fails at the margin not because of poor correlation 92% of market moves are within 2 standard deviations of the mean rather than the expected 95% for a 97% correlation of model to reality. However effectively all of the 2 sd events are to the downside leading to overpricing of calls and underpricing of puts.

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.

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.

Simplifying and elaborating on neuro and behavioral economics is difficult. Beyond saying that the same circuitry is used for picking mates, friends, budgeting and picking investment vehicles and the use of terms like being married to your trade are used because they conform to observed behavior it gets complicated. What can be said is that price inflation even more than prosperity correlates with higher divorce rates, runaway/throwaway kids and other expensive pathologies.

 

[william the wie]

I think the US has been a world power since WWI. Some say before that even.

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.

This is absolutely correct. The US benefits enormously from the dollar being the reserve currency.

Or at least it had. Whether or not it will in the future is an open question. The perils of using fiat currency may outstrip the benefits.

The use of the dollar as a reserve currency is a quid pro quo for paying the defense budgets of Latin America, western Europe, the Far East and increasingly south west Asia. The cost/benefit ratio appears to be unfavorable.