Is it ok to inflate the money supply when productivity rises?

[blazespinnaker]

This is something you can really only do with a fiat currency.

Let's say, the world discovered a new fuel technique tomorrow and prices started to tank because everything became much much cheaper to produce.

Would it be OK to heavily inflate the money supply in order to maintain price stability?

Wouldn't this be impossible to do with a gold-backed economy?

[Alfredo Dominguez]

Wouldn't it be cheaper to produce gold?

[Alfredo Dominguez]

And just what are the advantages to price stability that make it so desirable or at least preferable to deflation anyway?

[blazespinnaker]

Well, you can't really produce gold on demand, that's why it's so handy! Also, I find gold problematic because it shifts too much wealth to gold producing countries.

We should survive on our merits, not because we happen to be sitting on a bunch of gold mines (or oil fields, etc)

The problem with deflation is that it discourages investment. Rather than putting your money to work, people just leave it in the bank sitting there as that becomes the safest place.

Money should be working at all times (another reason I dislike gold) .. people who are not investing in a way that is producing for the world should not be allowed to have significant sums of money.

[blazespinnaker]

This discussion, btw, is not merely theoretical. I'm trying to understand some of the ideas behind the fed, and I believe inflating the money supply because of productivity / globalisation is something they see as reasonable.

The problem, of course, is that it leads to all these asset bubbles.

[Alfredo Dominguez]

If no one were to invest, how would a relatively stable supply of gold increase in value? That is, if no one is creating new wealth, how will a given amount of gold be able to purchase more wealth? The answer is that it is impossible for gold to increase in value (holders of gold experience price deflation of real goods) without saving and investment. Therefore, the fear that a gold standard and price deflation will preclude saving and investment and "unfairly" reward hoarders is as ridiculous as claiming that price deflation will also preclude consumer spending. After all, does the fact that a price of a loaf of bread might be cheaper next week mean that you will starve yourself for a week (a month?) in order to buy it at that lower price? Of course not. Instead, consumer spending becomes more careful and less prone to excess. The same result would hold true for investments and result in far fewer misallocations and a more stable environment than one built on liquidity bubbles, debt, and the "greater fool" theory.

As for your assertion that no one should be allowed to hold money who isn't utilizing it to produce "for the world," that is a patently communistic and anti private property stance. It presumes that a man exists for mankind and denies him the right to make use of his time, labor, and the product thereof in a manner he sees fit.

[blazespinnaker]

Yup, I think man should work a little harder for mankind.

Maybe we'd stop destroying our planet, that way

I think people mistake meritocracies for rational self interest. The former makes perfect sense, the latter works out in the short term but never the long term because people tend to die.

[blazespinnaker]

The advantage of a fiat currency is that it does lose value. There is a tax on not investing it intelligently, it's called inflation.

I have 500K I want to invest.

If it was backed by gold, then I probably wouldn't feel the urgency (at least, not as much) to invest it because I could probably maintain the value of my money.

But this wasn't really a discussion about gold, because we have a fiat currency not gold backed money. It is also a discussion about what is in the mind of the fed, the ones who make the rules.

The question is: is it ok to inflate if productivity rises? Or better yet, does the fed believe it is ok to inflate if productivity rises?

I believe they do. So after periods of significant productivity and/or globalisation I think it's only reasonable to see asset prices rise.

[ChessMan]

...everything became much much cheaper to produce.

Would it be OK to heavily inflate the money supply...?

Who gets the newly printed money? What happens to existing savings?