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>> Ideally, the money supply would expand exactly in proportion to the real economy, so there wouldn't be price fluctuations due to money at all, but this is ha

>> Ideally, the money supply would expand exactly in proportion to the real economy, so there wouldn't be price fluctuations due to money at all, but this is hard to achieve, because there's no clear-cut way to quantify the size of the real economy (GDP doesn't really work) and because it'd be difficult to devise a mechanism that could keep the money supply indexed to the real economy without having it be dependent on some sort of central authority. So a currency that maintains a constant relation with the real economy probably isn't an option here and now. I disagree. A money supply that was perfectly indexed to the real economy would magnify ups and downs. Nobody wants a slight downturn to result in a death spiral because the money supply keeps getting incrementally tighter. >> If we have to choose between maintaining a single monopoly inflationary currency, or adding a deflationary alternative currency like bitcoin into the mix, such that each currency can temper the excesses of the other, I think the latter is a better choice. I'm not saying bitcoin is the worst thing ever, but I think its design will keep it from making a big positive impact. It'll be a novelty akin to precious metals but with more volatility and fraud.

Gormo 14y ago
> I disagree. A money supply that was perfectly indexed to the real economy would magnify ups and downs. Nobody wants a slight downturn to result in a death spiral because the money supply keeps getting incrementally tighter. How so? If the money supply stays constant during a recession, that's what would magnify its effects, because the downturn in the real economy would be compounded by the currency being worth less and prices, in real terms, being higher. You might argue that people might be more likely to refrain from spending if the money supply contracts in the wake of a downturn, but this isn't the same as refraining from spending due to deflation, because holding on to money for longer doesn't increase its purchasing power in this scenario like it does with constant deflation. The whole idea of binding the size of the money supply to the size of the economy is to keep the value of currency constant no matter what happens in the real economy: a dollar would always buy the same amount of utility, regardless of whether the real economy is expanding or shrinking. Bear in mind also that downturns are often instigated by inflation in the first place. If the money supply expands faster than the real economy, then the only way to maintain the value of your assets is to invest them in something that produces a return greater than inflation. But, by definition, there isn't enough real value being generated to provide a viable investment opportunity for every dollar - if there was, then the money supply wouldn't be growing faster than the real economy, and there wouldn't be inflation. So inflation actually incentivizes speculative bubbles, which damage the real economy when they burst.

Gormo 14y ago

> I disagree. A money supply that was perfectly indexed to the real economy would magnify ups and downs. Nobody wants a slight downturn to result in a death spiral because the money supply keeps getting incrementally tighter. How so? If the money supply stays constant during a recession, that's what would magnify its effects, because the downturn in the real economy would be compounded by the currency being worth less and prices, in real terms, being higher. You might argue that people might be more likely to refrain from spending if the money supply contracts in the wake of a downturn, but this isn't the same as refraining from spending due to deflation, because holding on to money for longer doesn't increase its purchasing power in this scenario like it does with constant deflation. The whole idea of binding the size of the money supply to the size of the economy is to keep the value of currency constant no matter what happens in the real economy: a dollar would always buy the same amount of utility, regardless of whether the real economy is expanding or shrinking. Bear in mind also that downturns are often instigated by inflation in the first place. If the money supply expands faster than the real economy, then the only way to maintain the value of your assets is to invest them in something that produces a return greater than inflation. But, by definition, there isn't enough real value being generated to provide a viable investment opportunity for every dollar - if there was, then the money supply wouldn't be growing faster than the real economy, and there wouldn't be inflation. So inflation actually incentivizes speculative bubbles, which damage the real economy when they burst.