From: melin@hlrz24.hlrz.kfa-juelich.de (Stephan Melin)
Newsgroups: bit.listserv.politics
Subject: Stability (Was: Re: why gold - NOT)
Date: 7 Jan 93 20:23:44 GMT
Organization: Forschungszentrum Juelich GmbH (KFA), Germany

In article <9301071717.AA21529@infoserv.ii.uj.edu.pl>, caius@II.UJ.EDU.PL (Grzegorz Albinowski) writes:
|> Stephan Melin pisze:
|> 
|> >> Now back to gold as money:
|> >> Gold would be nothing more than a return to an exchange economy.
|> 
|> One of the purposes of money is STORE OF VALUE. People want to save some of
|> their earnings to spend them later of invest to earn more. Instability
|> of value and especially high inflation disrupts this function, resulting
|> in harm to the economy (that is to our walets)
|> 
|> >> Growth of the economy cannot take place unless a violation of [D1] is
|> >> encouraged, because the amount of gold stays fixed but the total value of
|> >> the IOUs increases.
|> 
|> The prices are going down (deflation), but the economy can still grow.
|> Could you explain why not?
We agree that inflation is bad, but that does not mean that the opposite
of inflation (=deflation) is good either, in fact deflation can be as harmful
as inflation. You wrote the purpose of money is to store value and that's 
exactly the point: the value of 1 currency unit ($) should remain fixed at 
least for some reasonable time. What one really needs is stability and no
inflation or deflation.
Why is deflation bad?
For most businesses, when they start to grow they need more money than they 
have, so they have to lend money (and pay interest of course). But with 
deflation money would become very expensive, because it would be profitable
just to keep the money (so this would be an absoulutely no risk way to make
a profit), whereas lending money always is a risk. Since the price of money
is also market driven and there is only very little supply the prices would
be very high. This would prevent these businesses from growing and therefore
the whole economy.


In article <9301071707.AA21359@infoserv.ii.uj.edu.pl> he writes:
[stuff deleted]
|> >> When the government starts manipulating the money, to cover a deficit,
|> >> then the voters (hopefully) will kick this bunch of incompetence out of
|> >> office at the next election.
[stuff deleted]
|> Maybe it was true in Germany. Most other countries had high inflations and
|> elections changed little or nothing.
Well germany is a bit different, although the heads of our central bank are
appointed by the government, once they are in office they are completely 
independent from the government. These people keep their positions until they
retire. The same system is used for the members of the supreme court in many
countries.
This led to the rather paradox situation, that the central bank did exactly
the opposite of what the government liked them to do:
In 1992 the government wanted to lower the interest rates to speed up (well
"start up" would be more appropiate) the economic recovery of the east german
industry - cheap money is good for investors. But this would have lead to
some rather big increase in the inflation rate and since it is the duty of 
the central bank to keep the inflation rate as low as possible, they just said
no, in fact they even increased the interest rates to lower the inflation rate.

|>
|> The problem is the majority of the voters are NOT economists. And majority
|> of the economists does NOT understand inflation.
But the voters will recognize, when a government, does its "best" to ruin the
economy.


P.S.: If some experts (I mean economists) are reading this list, I'd really 
      like to read some comments.


Regards
-- 
Stephan Melin

melin@hlrserv.hlrz.kfa-juelich.de   ||    hkf418@djukfa11.bitnet

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