From: jfh@beach.cis.ufl.edu (James F. Hranicky)
Newsgroups: sci.econ
Subject: Re: GM Plant Closures Again? Won't Solve the Economic Problems
Date: 4 Jan 93 23:43:46 GMT
Organization: Univ. of Florida CIS Dept.

In article <df3J03pYc6aM00@amdahl.uts.amdahl.com> fierro@uts.amdahl.com (Doug Fierro) writes:

>>The general rise in prices of all goods and services is indeed the
>>result of increasing the money supply. 
>
>  I think a better explanation of inflation would be when the ratio of
>dollars to goods (and services) increases.  I can think of a few scenarios
>where prices would rise even if the money supply remained constant.
>
>  Doug

Certainly, in cases where supply was suddenly decreased or where
demand suddenly increased, but these would not cause a rise in prices for
all goods and services. If the money supply were increased at par with
production, there would probably be little or no price inflation. However,
the government can never know just how much production has increased, so
this process in self defeating, even if the government were responsible
(HA!). 

In an economy with a hard currency, a rise in prices means that suddenly
a good has become more dear to more people. In a fiat-currency economy,
a rise in all prices means not that all goods and services are now more
dear, but that the unit of currency is diminishing in value, essentially
a tax on savers.

What the gold standard does as time goes by is to keep the amount of
currency nearly constant. If in 1900 there is 100 billion dollars in
currency, and on the average a a fresh addition of 1 billion a year, as
time goes by this increase becomes a smaller and smaller *percentage*
increase from the year before. At first it is a 1% increase, but in 100
years it is only a .5% increase, etc. If trade and production grow faster
than the money supply, what happens is a *slight* deflationary tug on
prices--prices will tend to drop, i.e., the value of the unit of currency
is growing.

There is a difference in the effects of an inflationary tendency and a 
deflationary tendency in the economy (Here I use the terms as an increase
or decrease in the money supply, *not* the effects on prices as such).
Inflation tends to give certain areas of the economy "free" money, and
these areas tend to over-produce and over-consume. Prices in these 
areas will now tend to rise. As prices rise, these areas will tend to 
return to the previous rate of production and consumption, except that
now, areas of the economy have been expanded which would not have expanded
under normal situations--but the situation is attempting to return to
normal. 
 Now, these areas of over-production will no longer be wanted, and
these areas of the economy will go under, causing a *recession*. This is
the true cause of the business cycle--between 1986-8, the Fed increased
the money supply some 18%. This must eventually lead to a recession, the
one we are just now coming out of. Hopefully, the government will not try
to stimulate the economy with more inflation, as this will certainly in
the short run stimulate production, but not production which would satisfy
the consumers under normal time preferences (time preference is the
preferred amount of saving over spending), so a bust is again guaranteed by
this action.

What the inflationary tendency does is stimulate an artificial boom, which
must be followed by a bust.

A deflationary tendency on the other hand, if large enough, would cause
an immediate recession. There would indeed be a shortage of money. However,
under a slight deflationary tendency, no over-production would occur,
and once the value of the unit of currency rose, the contraction would be
over. If the pressure is slight enough, it might not evern be felt.

Inflation also lowers interest rates. The price mechanism of the market
balances supply and demand, allowing a gradual accumulation of capital as
time goes by. If the supply increases relative to demand, the price will 
fall, or the producers will have a surplus. If the supply decreases
relative to demand, the price will rise, or the producers will
not be able to keep up with demand--they will have a shortage of goods to 
sell. Banks have a supply of capital to be loaned, and the borrowers have
a demand for loans. What the rate of interest does is balance the amount
of capital loaned with its supply--the rate of interest is there to assure
that not too much capital is loaned out and to assure a gradual
accumulation of captial, as well as make a profit for bankers. However,
inflation causes more capital to be loaned out than should be loaned out,
according to the time preferrences of the public. This causes a consumption
of capital, rather than an accumulation of capital, and accumulation of 
capital is the true source of wealth--the more capital there is, the lower
its general price, and the higher its availability for all. Consumption
of capital means that in the long run there will be less in the future, as
it is being used now.

Inflation also causes the savings of the public to dwindle as time goes by,
adding more to immediate consumption rather than saving.

The ultimate effect of inflation is to sell the future for the present.
Deflation causes *perhaps* a tightening of the belt now, with the promise of
more to come in the future. 

A solid currency is a prerequisite of a free society, as it insures that
the society will prosper. Inflation leads to the business cycle, causing
increased stress, leads to capital consumption, meaning less for all, and
eventually must fail.

As I have pointed out before, one of the best works I ran across was 
"The Case for Gold", by Ron Paul. Check it out.

Jim Hranicky (jfh@reef.cis.ufl.edu)
Newsgroups: sci.econ