Inflationary Spiral

[joel]

False. This is the biggest error of Austrian-school economics. They are not alone in this error, but they certainly do have their share of it.

Fiat money does have value in the market, precisely because of that government mandate. It has no intrinsic value (unless you look at the value of rag paper), but value can be intrinsic or extrinsic.

This is not a belief of Austrian-school economics. You are attacking a straw man. Austrians acknowledge that it has market value because of government fiat. But that is their point--that it has market value only because of government fiat.

False. Commodities most certainly can be inflated (or deflated) by the government, as the government has the ability to manipulate the market.

To some extent, but the government has not yet figured out how to bring more gold (for example) into existence.

Your arguments against anarcho-capitalism do not point out flaws in the original argumentation, and have nothing to do with the question of inflationary spirals. One does not have to accept anarcho-capitalism to accept the arguments in the OP. (For example, I don't.)

The only on-topic argument you have made is that you seem to think that people in general would not seek to reduce/eliminate their cash holdings (including bank deposits and bonds payable in currency, etc.) in the face of expected drastic declines in the purchasing power of the dollar. It is not clear why you think this is the case. What would motivate the population to hold on to their dollars? You must have in mind some very strong motivation indeed since you think to act contrary to it would be moronic. Do you really think most people would consider that this action of theirs will tend add to inflation (however slightly) and thus refrain out of some sense of...patriotism or common good? It's not clear that they would have reason to believe that other people will do the same.

It is also not clear that the result would be economic destruction. It would certainly cause some short-term disruptions, but people would likely be quick to switch to something else as money in the event that the dollar suddenly lost all value, and productive capacity would continue as before.

[technomage]

This is not a belief of Austrian-school economics.

If it is a "straw man," then it belongs to Uberliber, not to me.

To some extent, but the government has not yet figured out how to bring more gold (for example) into existence.

But they can buy and hold gold, removing it from the market, or flood the market with gold held in reserve. They could even (as some governments have done) seize large gold-producing operations for greater control of the gold market. Again, I use the term "hydraulic despotism" quite deliberately, though somewhat irregularly, as we are not dealing strictly with water, but with any commodity, gold being one classic example.

Your arguments against anarcho-capitalism do not point out flaws in the original argumentation, and have nothing to do with the question of inflationary spirals. One does not have to accept anarcho-capitalism to accept the arguments in the OP. (For example, I don't.)

My arguments are mostly directed towards Rothbard's branch of the Austrian School, and do not truly correspond to Hayek or Mises, I will acknowledge. However, uberliber gives every indication of adhering to Rothbard's thinking. And while my arguments do not directly address Uberliber's post concerning inflationary spirals, I still contend that his analysis of this particular aspect of economics is based in his implementation of Austrian School economics. If I do not directly deal with the topic, yet demonstrate that the foundation of his thinking is flawed, this still dispenses with his particular arguments.

The only on-topic argument you have made is that you seem to think that people in general would not seek to reduce/eliminate their cash holdings (including bank deposits and bonds payable in currency, etc.) in the face of expected drastic declines in the purchasing power of the dollar. It is not clear why you think this is the case.

Actually, I do agree that people will reduce or eliminate their cash holdings in American currency (and related commodities, such as T-bills and other treasury securities). But in addition to purchasing goods, they will also invest in other currencies that enjoy a higher confidence. I'm given to understand that the Euro is doing quite well--anarcho-capitalists would probably view this as futile, as it is nothing more than switching from one fiat currency to another. The transferrence to the Euro directly contradicts uberliber's prediction that dollars will be dumped in exchange for goods, whether or not those goods are an acceptable investment (in his views).

It is also not clear that the result would be economic destruction. It would certainly cause some short-term disruptions, but people would likely be quick to switch to something else as money in the event that the dollar suddenly lost all value, and productive capacity would continue as before.

Production capacity might suffer in the short term, and some specific companies would certainly be hurt, or cease to exist. The problem with Uberliber's view (perhaps with yours as well, though I only have a brief statement that may not represent your full views) is that he says "money," but seems to mean solely "the dollar." There are still other currencies out there.

[joel]

But they can buy and hold gold, removing it from the market, or flood the market with gold held in reserve.

Not for long. Such is hardly comparable to the ability to create arbitrary quantities of new dollars ex nihilo. Governments abandoned the gold standard because they couldn't manipulate the supply of gold as much as they wanted to. The gold supply was a restraint upon government.

If I do not directly deal with the topic, yet demonstrate that the foundation of his thinking is flawed, this still dispenses with his particular arguments.

One could consistently reject the privatization of police/law/defence/etc., and still be convinced by the reasoning of the rest of Austrian economics. I would not say that that one topic is the foundation of all Austrian economics.

Actually, I do agree that people will reduce or eliminate their cash holdings in American currency (and related commodities, such as T-bills and other treasury securities). But in addition to purchasing goods, they will also invest in other currencies that enjoy a higher confidence. I'm given to understand that the Euro is doing quite well--anarcho-capitalists would probably view this as futile, as it is nothing more than switching from one fiat currency to another. The transferrence to the Euro directly contradicts uberliber's prediction that dollars will be dumped in exchange for goods, whether or not those goods are an acceptable investment (in his views).

That's no different. It will still result in price inflation of the U.S. dollar--in this particular case by bidding up the (dollar) price of the Euro, as opposed to some good. It will take an increasing number of dollars to obtain one Euro. Insofar as Euros (instead of dollars) are then used to purchase goods, this price increase is transferred to the goods. (This is all assuming, as you do in this example, that the Euro is not hyperinflating at the same time.)

Ultimately, in such a scramble to drop the currency, people end up buying whatever they possibly can (including goods and other, stronger currencies). Anything at all that other people will still accept their dollars in exchange for, whether they need that thing or not.

The problem with Uberliber's view (perhaps with yours as well, though I only have a brief statement that may not represent your full views) is that he says "money," but seems to mean solely "the dollar." There are still other currencies out there.

Money is generally defined as the predominant medium of indirect exchange. In the U.S., this is currently Federal Reserve Notes (plus fiduciary media such as checking account deposits), denominated in "dollars." (whatever a "dollar" is.) Euros are money--in Europe, but not in the U.S.

Uberliber is describing an inflationary spiral, which must refer to that which is money, whatever that happens to be. In the U.S., that's 'dollars'. Such a spiral could result in whatever is money ceasing to be money at all. In which case it is likely that something else (perhaps Euros?) would de facto become money instead.

It is interesting to note that in American history, foreign currencies once circulated freely alongside U.S. currency, until the federal government stopped that by force and siezed a monopoly for itself.

Another interesting bit of info is that the world has been completely on fiat currencies for only about 37 years (when Nixon severed the last ties between the 'dollar' and gold). So this is a relatively young economic experiment we have going on.

[uberliber]

I generally agree with the main argument: that if most people predict a drastic decline in the value of the dollar, then people will naturally seek to reduce their cash balances, thus causing inflation to be greater than it would have been otherwise. If the expectation of inflation is high enough, then people will want to reduce their cash balances to zero, thus dropping the market value of the dollar to zero and raising prices (denominated in dollars) effectively to infinity.

I have some comments, corrections, and thoughts for further discussion:


Or an accumulation of capital goods. But you may have been taking implicitly that this is precluded by the increased consumption?

I'm not sure I agree here. The extra inflation results from the peoples' expectation of inflation. But this expectation also causes interest rates to go higher (because people won't want to lend something of value in return for a promise to pay something of lesser value in the future). If the price premium on interest rates is not high enough to compensate for expectations of inflation, it will quickly be pushed up higher. In the hyperinflation in Germany for example, interest rates went above 90%.

So then I'm not following your reasoning about credit expansion being part of the inflationary spiral (except for additional expansion intentionally caused by the government). If people are trying to get rid of their cash balances, they will be trying to get rid of their bank deposits too. This might reduce bank reserves. I'm not sure why it would tend to increase bank reserves.

I think you mean "props down" the prices. But, yes, this would create massive shortages and starvation.

One other thought I had:
Can taxation prop up the value of a hyperinflating currency? If the government were to demand, say, $10,000 from every individual or they would be thrown in jail (or beaten up or executed or what have you). Then, out of fear of the sword, everyone would seek to increase their cash balances through trade in the market in order to pay 'protection money' to the mafia government, thus propping up the value of the dollar by force. But I suppose, on the other hand, that if the economy were making a massive exodus from the dollar, then it could become impossible for the government to enforce such a taxation.

If you haven't yet noticed, I still don't know how to quote individual parts of paragraphs. So I will just number them.

1. "Or an accumulation of capital goods. But you may have been taking implicitly that this is precluded by the increased consumption?" Yup

2. "I'm not sure I agree here. The extra inflation results from the peoples' expectation of inflation. But this expectation also causes interest rates to go higher (because people won't want to lend something of value in return for a promise to pay something of lesser value in the future). If the price premium on interest rates is not high enough to compensate for expectations of inflation, it will quickly be pushed up higher. In the hyperinflation in Germany for example, interest rates went above 90%."

But interest rates would not increase because they are fixed by the FED buying bonds from banks and other OMOs. Banks would certainly increase the interest rates you would think, but remember that the rates are dependent on loanable funds. The amount of loanable funds depends on their reserves which the FED fixes for the most part.

3. "So then I'm not following your reasoning about credit expansion being part of the inflationary spiral (except for additional expansion intentionally caused by the government). If people are trying to get rid of their cash balances, they will be trying to get rid of their bank deposits too. This might reduce bank reserves. I'm not sure why it would tend to increase bank reserves."

There are two points I was making here. First, this just happens every day. Credit is expanded every day and contributing to more inflation. So that just adds to it. But the other point, is that more people are taking out loans. Sure people will take money out of the bank to get rid of it, but the loanable funds do not change by the amount withdrawn. The FED can increase the reserves which they will undoubtedly do to increase credit. In a free market situation, you are right. But with the FED manipulating the amount of loanable funds, it changes. And the more loans made, the further inflation.

4. "I think you mean "props down" the prices. But, yes, this would create massive shortages and starvation."

Once again, yup. My laziness prevents me from checking over what I write.

5. "One other thought I had:
Can taxation prop up the value of a hyperinflating currency? If the government were to demand, say, $10,000 from every individual or they would be thrown in jail (or beaten up or executed or what have you). Then, out of fear of the sword, everyone would seek to increase their cash balances through trade in the market in order to pay 'protection money' to the mafia government, thus propping up the value of the dollar by force. But I suppose, on the other hand, that if the economy were making a massive exodus from the dollar, then it could become impossible for the government to enforce such a taxation."

Interesting thought. I think you would be right if the government took all that money and burned it. But they wouldn't. The government would use it to fight unemployment, fix infrastructure, etc... So this forced taxation would fight inflation if they took the money out of the economy entirely, but we know they would never do such a thing. They would probably just pump it right back in.

[uberliber]

If I stop distinguishing between the mainstream definition of free market, and the anarcho-capitalist definition of free market (or "statism," or a few other terms that anarcho-capitalists use, but by which they mean radically different things than the mainstream definition), then confusion between two radically different terms occurs. Many anarcho-capitalists use that confusion deliberately to make their arguments more palatable. It's called "equivocation"--it's dishonest, and dishonorable, but in and of itself, it is revealing that some anarcho-capitalists feel they must use dishonest means to sell their arguments.

I have absolutely no problems whatsoever with free markets. I benefit greatly from the free market, and would vigorously resist any attempts to turn our economy away from a free market. But I use the mainstream definition of the term free market, which acknowledges the need of some form of government regulation to maintain that market free from predatory behavior.



A discussion of inflationary spirals--or of any economic condition--cannot be undertaken without first clearly defining terms. Your use of terms (as I've noted before) is radically different from the mainstream--different enough that the difference must be pointed out and acknowledged.



I am discussing your economic theory!



Again with the insults! Could you please point to a single incident where I have insulted you? Are your arguments so shallow that equivocation, insults, and attempts to silence your opponents, are the only tools you have to make your point?



Emphasis added. What precisely do you think motivates theft, uberliber? A person decides that it is a cheaper investment of his time and effort to steal something, rather than to earn it. To him, that is acting to the best of his rational potential. You and I may feel that theft is not rational--but the decision of what is, and what is not, rational is subjective, and our aversion to thievery is not universal.



Excuse me, but you are again using the term "free market" to mean something radically different from the mainstream meaning.

For the lurkers: in anarcho-capitalist terminology, "free market" means the exchange of goods and services in a community with no government whatsoever. While minarchists accept the need for a minimal government, anarcho-capitalists desire the abolition of the government completely, in any form. In an anarcho-capitalist community, all trade is based in the concept of non-aggression: theft, fraud, or coercion would be punished either by private enforcement (think private investigators, or private police officers who enforce the law for the highest bidder), or by community censure.



False. There were, and are, cultures that have what an anarcho-capitalist would consider a "free market" economy--this is the kind of market that exists within tribal societies with no (or a very weak) central authority. Historical examples include some of the pre-Colombian Native Americans, the pre-Gengis tribal residents of Mongolia, many areas in Africa, and possibly the pre-Roman Celts. Examples today include tribal areas in the Middle East, Asia, Africa, and South America. These areas would be a paradise for anarcho-capitalists--save that they are rife with violence, cannot maintain any permanent infrastructure, and experience frequent events that most anarcho-capitalists would consider highly unproductive, such as slaughter, rapine, ecological disaster (without the infrastructure for recovery), and lives that are generally "nasty, brutish, and short."



Again, we're back to the question of "what does a person do when he decides that theft is for his maximum benefit?" Or to take the point further--how would an anarcho-capitalistic society react to a group of people with a strong leader who decided to take by force whatever they wanted from the community?

Anarcho-capitalism has only very limited defenses against the individual criminal, and no defense whatsoever against the would-be tyrant backed with sufficient force.



Which is entirely lacking in anarcho-capitalism.



There's absolutely nothing "evil" about capitalism. Indeed, there's absolutely nothing "evil" about anarcho-capitalism. If it were workable, anarcho-capitalism would, indeed, be the best possible economic system. However, anarcho-capitalism has no systematic defense against people who choose to do evil. The only defense in an anarcho-capitalistic community would be ad hoc, privately funded, and subject to the highest bidder. If the would-be tyrant outbid you, the security company you hire may come gunning for you!



Economics--like all other areas of life--cannot be separated from morals.



And if the criminals are more powerful than than the protective agency can afford to be--what then? Worse yet--if the criminals offer the protective agency more money than you offer...?



Ah, and here we have the lynch-pin of anarcho-capitalistic discontent--"Government is evil." You, a student, are certainly willing to benefit from the government whenever you can (as shown by your insistence on staying in school), but you don't want to accept the fact that the benefits you gain come at a price. You insist that these benefits are yours by right, until such a time as the current system can be stolen and rearranged more to your liking.



Now, be so kind as to point out where I said that. What? You can't? Of course you can't, because I did not.

First and foremost, humans are not entirely evil, nor are we entirely good. We, each of us, have the potential for both, and can choose which we shall do at any particular moment, based upon our worldview, our perceived benefit, and our personal choices of the moment. Secondly, the existence of government (and of the laws which the government makes and enforces) does not make human evil "disappear." It does suppress some of it, but not all--and when human beings act in an evil manner, the government does its best to stem such evil.

Does that make the government perfect in my eyes? Of course not. The government is (and this you will agree with me on) wasteful, inefficient, notoriously slow, and full of people who also can choose to do evil. But it also builds the infrastructure that makes any kind of market possible.

What has any of this to do with economics? As I said earlier, you cannot separate economics from morals, because economics is a human activity. Humans have the potential to do wrong. Given that they have the potential, all people will, from time to time, choose to do something that is wrong. The rule of law, like democracy, is a lousy solution--but it is the best solution found so far.



"If you cannot defeat their arguments, silence them." That sounds like coercion, Uberliber. Sounds like you take this to heart just as much as the government you so despise.

All of my responses in this thread deal with your theory of inflationary spirals--only they do not do so directly, they deal with the foundational worldview from which your theory springs. No sound theory can be built on a flawed foundation: I would say that the above posts demonstrate that your foundation is flawed beyond redemption.

And, you will note, I demonstrated the flaws in your argument without resorting to equivocation, coercion, or personal insults. Pity you couldn't do the same.

I am not going to reply to any of that because you still haven't said a thing about the inflationary spiral. This is not a debate about austrian economics, it is a debate about the inflationary spiral. Go create a thread about failures of austrian economics and I will join. But keep to the topic.

[joel]

If you haven't yet noticed, I still don't know how to quote individual parts of paragraphs.

You just type extra quote codes around various text. E.g.,

[quote]
their text
[/quote]
your response

[quote]
more of their text
[/quote]
your further response

But interest rates would not increase because they are fixed by the FED...

I got you now. But the Fed can do so only by further inflating the money supply. This, by itself is sufficient to cause an inflationary spiral in such conditions. The Fed would have to inflate the money supply at ever-increasing rates to keep up with the ever-increasing market pressures for interest rates to increase.

Interesting thought. I think you would be right if the government took all that money and burned it. But they wouldn't. The government would use it to fight unemployment, fix infrastructure, etc... So this forced taxation would fight inflation if they took the money out of the economy entirely, but we know they would never do such a thing. They would probably just pump it right back in.

I agree contracting the money supply would help oppose price inflation. But it seems possible that what I'm describing would help toward propping up the purchasing power of money, even with a constant money supply. I think taxation and spending likely is what props up the purchasing power of fiat money even during 'normal' conditions.

For example, suppose a fiat money and the money supply is held constant. It is still effectively a 'market bubble' that could burst at any time unless there is something that gives the currency a non-monetary value. Otherwise we are in a situation where I value it only because I think you do and you do only because you think I do, so we could wake up tomorrow and realise this silliness and burst the bubble. I think this non-monetary value is probably taxation (i.e., I demand a certain quantity of dollars not for its purchasing power, but in order to 'pay off' the government so they don't throw me in jail.). Suppose for example that we were to wake up tomorrow and realized that the dollar is intrinsically worthless, so we en masse decide to stop using it, and so it's value drops (for example) from $1000/oz of gold to $1million/oz of gold. Suppose the previous year you made an income of $40,000, and the tax rate was 25%, so you had to pay $10,000 in income tax. And in this new year, everyone shunned dollars as worthless and started using gold, and you make an income of 40 oz of gold. But the government still demands payment of taxes in dollars. They make you compute your income at the current market rate of $1million/oz of gold, thus you have to report your income as $40million, and the government thus demands $10million in income tax. A similar thing happens to everyone, and everyone is demanding millions of dollars not for its purchasing power, but in order to keep from being thrown in jail. Everyone has to obtain these dollars on the market, but my beginning assumption is that the money supply has not changed, and so this non-monetary demand for dollars pushes the purchasing power of the dollar back up, even though the monetary demand fell to zero. And this purchasing power can then support monetary demand.