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An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop an
by hahajk 5y ago
An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.
- lazide 5y agoWhich means people need to work harder for every hamburger or the like and a deflationary spiral could occur which is even more terrible than an inflationary one. I think the parent was referring to ‘to keep the commodity/cash stable’
- slaymaker1907 5y agoI think you could just lower the exchange rate for how much gold the central bank will give for dollars then print more money. This devalues the currency, but that's precisely what you want in the case you gave.
- zarzavat 5y agoThis is likely to lead to a run on the bank as everybody rushes to exchange their money for gold. Eventually the peg collapses and we are back to non-exchangeable currency. Gold standard only works as long as everybody believes that the exchange rate will not change.
- eru 5y agoWhy would people need to work harder for each hamburger? The relative prices of hamburgers to labour don't need to be impacted by the price of gold, or do they? What do you mean by deflationary spiral? A decrease in price level during a recession is bad news indeed; but a decrease in prices in some sector due to productivity growth is great for business. Just look at falling prices of electronics in the last few decades.
- lazide 5y agoIf ‘currency’ becomes more valuable every year (deflation), people try to save as much as they can and reduce spending as much as they can to compensate for it in advance. So people would get paycuts every year instead of raises, and the ‘better employers’ would just cut less than everyone else. The hamburger shack would also have layoffs regularly, as every time the expectation for how fast the ‘currency’ got valuable increases, everyone would cut back on non-essential (or even essential) spending to save more. And burgers are generally not seen as truly essentially/someone would die from not having it. Especially since in a deflationary spiral, ideally you’d literally not spend ANY of the currency, since any that you save now would be worth far more the more you delay it. Folks would rather grow food in their back yard than go to the grocery store so they’d be rich in a year. This is in contrast to a inflationary spiral, where the incentive is to spend all money as soon as you get it, so the value of it doesn’t have time to decrease and prices increase before you do.
- eru 5y agoWhat you are describing as a 'deflationary spiral' is a collapse of nominal demand. Or, equivalent, of nominal GDP. Nominal GDP unexpectedly dropping is indeed bad news. However, it's perfectly feasible to eg stabilize nominal GDP at some desired level. Productivity increases would then lead to a drop in the price level; without any of that spiral you describe. That's similar to the productivity increases we have seen in eg the electronics industry over the last few decades, which lead to dropping prices for electronics. George Selgin wrote a lot about this topic. See eg https://www.mercatus.org/bridge/podcasts/05232016/george-selgin-productivity-norm-deflation-and-monetary-history https://www.mercatus.org/bridge/podcasts/05232016/george-sel...
- colechristensen 5y agoUncontrolled deflation would be linked with growth and wealth concentration would be a serious problem with corresponding unwillingness to purchase anything. need is of course a complicated word
- throw0101a 5y ago> […] prices would drop and there would be deflation, for better or for worse. I have yet to see an historical example of "good" deflation: * https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
- moltke 5y agoI think most of the poorer people would be happy with deflation right now. Between housing and fuel inflation hasn't been kind to people either.
- throw0101a 5y agoA lot of poorer people have debts, which would be made worse by deflation. Even the not-poor people who have mortgages are helped by inflation.
- chii 5y agothose poorer people imagines, incorrectly, that their jobs would remain when deflation happens.