Twice in my education, once in middle school and once in college (my instructor did a very dramatic read of William Jennings Bryan's "Cross of Gold" speech), I encountered the Free Silver movement in history classes. I never understood it then and to this day I still don't understand what the kerfuffle was about. It seems like a religious doctrinal difference rather than one that would have any real economic effect.
Somewhat before I cared about money, in 1971, Nixon decoupled the dollar from gold, and although I do recall hearing about the accompanying wage/price freeze, I don't think it's ever mattered to me whether or not I could exchange my paper for gold.
You couldn't exchange your paper for gold since 1931. Maybe that's why it felt like nothing changed to you. However, institutions could. Since 1971, unfettered monetary inflation has been used to siphon wealth from the people for the benefit of a segment of rich elites close with the federal reserve. It's no coincidence that real wages haven't increased significantly since that Nixon administration. https://economics.stackexchange.com/questions/15558/producti...
Requiring backing for dollars was a real limiter on inflation and government spending. Inflation fuels an ever increasing debt cycle that is incredibly harmful for the economy, but great for banks and financial institutions.
> Requiring backing for dollars was a real limiter on inflation
Which directly leads to instability when the value of the backing changes. I'm not aware of any mainstream movement amongst orthodox economists to revert to pre-Nixon policies.
That's understandable. The value of stability seems to be doctrinal in orthodox economics (it is the orthodoxy, after all)
Like any other metric, stability comes at a cost (and it also comes with baked-in assumptions). I wish there were more rigorous discussion of what the social cost of stability is (is it worth it to have stability if that means siphoning money from the poor?), who benefits from 'stability', what values our metrics for stability encode, and to what extent the Federal Reserve system is a victim of Goodheart's law in all of the goals it seeks, to include 'stability'.
It is undoubtably the working classes who benefit from stability. The people who control businesses are not laying themselves off first, nor are they living paycheck-to-paycheck.
There is quite a lot of reason to doubt that is the case in the long run. What I think dnautics is saying is that stability is trading off short term gains for long term gains. What about the stagnated real wages in the last 50 years? Is that good for the poor? What about seigniorage? Is that good for the poor?
When someone says something like "undoubtedly/obviously X" or "its commen sense that X" 99% of the time they haven't put much thought into it.
We're not comparing equal "short term" and "long term" events though. The short term effects are much more severe in nature. And because they are severe, these "short term" economic effects end up causing long term financial impacts for the people they impact, even after the economy has recovered.
Most non-high income people do not have huge rainy-day funds. If they lose their job, even for a short period of time, they will find themselves relying on debt that is a lot more expensive than 2% inflation.
Stability has a high value, it is just hard to measure in dollars.
> When someone says something like "undoubtedly/obviously X" or "its commen sense that X" 99% of the time they haven't put much thought into it.
Or rather, it's an easy question to answer because we've seen the situation happen many times. Who suffers during economic downturns?
We should probably define what kind of stability we're talking about before we devolve into fisticuffs. Are we talking about a "stable" economy? A stable buying power of the currency? Something else?
Well, in a gold-backed world, we had frequent but small bubbles that corrected inefficient economic activity relatively quickly. In a post-gold-backed world, we have less frequent but much much larger bubbles that result in devastating economic crises. Is that really the stability you want?
With modern economic knowledge, technology, and techniques, a gold-backed dollar could be quite a bit more stable than it was in the 1800s, don't you agree? But we don't have to go back to gold to fix this problem. The problem is not gold or not gold. The problem is massive monetary inflation. That can be solved without going back to gold backing. What gold-backing did was create a culture that believed in a limited money supply. When we destroyed that culture, we created the problem.
Has it not occurred to you that it's precisely the modern economic knowledge, technology and techniques that have driven us away from gold backed dollars or trying to fix the money supply (and float the interest rate or crash the banks)? I mean, macroeconomists have spent the majority of the last century proposing and carrying out natural experiments on different monetary policies: if they've moved from being almost universally in favour of the Gold Standard to almost universally against it, that's not evidence that what we've actually learned is how to make a Gold Standard work.
And no, our post-gold standard economic crises have not been proportionally more devastating than the Great Depression, or taken as long to rectify as the Long Depression, and I don't long for that kind of "stability"
> Has it not occurred to you that it's precisely the modern economic knowledge, technology and techniques that have driven us away from gold backed dollars
It hasn't because its patently false. Both the gold confiscation in 1931 and cutting the cord of gold-backing in 1971 were both done as desparately rushed moves to reneg on the governments promise to uphold the value of the dollar. These weren't thoughtful reasoned well discussed actions. It had nothing to do with technology or best practices. It was a purely a politically expedient way to prevent collapse of an insolvent dollar.
> macroeconomists have spent the majority of the last century proposing and carrying out natural experiments
You don't run experiments in macroeconomics. Controls are impossible. And studies have so many confounding variables that any conclusions we come to are many orders of magnitude less certain than anything in the hard sciences.
> our post-gold standard economic crises have not been proportionally more devastating than the Great Depression
You must have misunderstood me. I never said any such thing.
Iirc our post gold standard crises have been nominally at least near as bad as the great depression. Of course we have much,much better infrastructure, healthcare, communication, etc, which economists tend not to take into account for how there aren't a starving people dying in the streets. None of that matters, it's all the stewardship of the fed.
> It hasn't because its patently false. Both the gold confiscation in 1931 and cutting the cord of gold-backing in 1971 were both done as desparately rushed moves to reneg on the governments promise to uphold the value of the dollar. These weren't thoughtful reasoned well discussed actions. It had nothing to do with technology or best practices. It was a purely a politically expedient way to prevent collapse of an insolvent dollar.
I take it you haven't read any mainstream macroeconomic analysis written over the course of the past century, the theory, analytical techniques and predictions which informs modern central banking practices. I have. It is certainly not patently false to suggest that there has been plenty of discussion and implementation of newer ideas, an enormous amount of focus on the dynamic of inflation, and the result is very few economists seeing any sense in the notion that the optimum quantity of money to support the growth of the United States happens to coincide with fluctuations in world gold output.
But even aside from the actual theory and techniques, part of the knowledge base is simply concluding that if it was necessary break a system to prevent the collapse of an insolvent dollar, it is probably best not to attempt to recreate that state of economic affairs.
> You don't run experiments in macroeconomics. Controls are impossible. And studies have so many confounding variables that any conclusions we come to are many orders of magnitude less certain than anything in the hard sciences.
We agree it's not a hard science, and that natural experiments are very difficult (they are especially difficult when a proposal like "maybe we should try to ensure a particular USD aggregate stays at a certain level, and raise interest rates as high as necessary to keep it at that level" results in mass unemployment. When "maybe we should fix the interest rates instead" turns out to result in inflation remaining within predictable ranges for the next three decades, it is even harder to recommend the former policy). Similarly, if the Gold Standard fails to deliver the stability it promises, and then its vociferous minority of advocates promise hyperinflation is around the corner every year for decades without ever being right, new theories which accurately predict inflation take over.
> I never said any such thing.
I may have misunderstood you. If we agree that the Great Depression and Long Depression were examples of significant economic crises in addition to periodic smaller financial panics and forced devaluations, we agree. I see that as a pretty good indication our current financial crises are less worse, especially given our current policy framework gives us tools other than "wait it out" to ameliorate the suffering.
> It is certainly not patently false to suggest that there has been plenty of discussion and implementation of newer ideas, an enormous amount of focus on the dynamic of inflation...
Ok. I agree with all of that. And none of it contracts what I said, which was that modern economic knowledge did not "drive us away from gold backed dollars". What drove us off the gold standard was rash actions by a federal government backed into a corner.
> if it was necessary break a system to prevent the collapse of an insolvent dollar, it is probably best not to attempt to recreate that state of economic affairs
Well, that conclusion conflates the solution with the problem. For example, if you're in an airplane and you recklessly burn all your fuel because you were having fun going fast and have to eject and abandon your plane to crash, the solution is not "bring more fuel next time" nor "don't use planes anymore". The answer is don't be an idiot and reckelessly burn all your fuel.
> If we agree that the Great Depression and Long Depression were examples of significant economic crises in addition to periodic smaller financial panics and forced devaluation
I think I agree with that.
I just don't agree that either of those depressions were caused because gold-backed currency isn't sound. In fact, before the Long Depression, we used gold backed currency. What caused the Long Depression was stupidly removing silver from the monetary supply very suddenly. That was an enormous shock to the economy that happened without enough warning. It was a monetary cliff, and cliffs are bad. Engineering transitions like that to be smooth and slow is the way to avoid that.
And the Great Depression was caused because banks lent out too much money and since the Federal Reserve had driven out all the private clearing houses and refused to act as lender of last resort. Bank runs contracted the money supply by 33%. Not sure how much that is in comparison to the Long Depression, but its a lot regardless.
> What drove us off the gold standard was rash actions by a federal government backed into a corner.
What drove us off the gold standard was that the gold standard backed the government into a corner, yes. What drove essentially all macroeconomists to conclude that this was the correct one was new theory about why this had happened, the economic possibilities of this new theory, the new theory turning out to allowing finer control over price stability than the Gold Standard had ever done and the woeful quality of the analysis of the few economists still defending the gold standard.
> For example, if you're in an airplane and you recklessly burn all your fuel because you were having fun going fast and have to eject and abandon your plane to crash, the solution is not "bring more fuel next time" nor "don't use planes anymore".
"Bring more fuel" sounds like a much better solution to fuel-shortage induced aircraft accidents than slowing down to me, and I'm confident that aircraft investigators agree with me.
Assuming that the real problem with running out of fuel isn't the quantity of fuel but that jets aren't limited to early 1900s speeds and engine technologies sounds like a pretty apt analogy for calls to return to a Gold Standard, actually...
> What caused the Long Depression was stupidly removing silver from the monetary supply very suddenly. That was an enormous shock to the economy that happened without enough warning. It was a monetary cliff, and cliffs are bad. Engineering transitions like that to be smooth and slow is the way to avoid that.
I think we can agree on that (though the reason it was removed is because the bimetallic standards with dollars redeemed in fixed quantities for commodities whose actual value ratio fluctuated were absurd). For related reasons, we decided monetary cliffs generated by metallic standards were worse than having an elastic monetary supply. The Great Depression was caused because the Fed could not print enough money to act as the lender of last resort. Again, a situation we seek to avoid by having the actual quantity of money determined by the amount of credit supplied and demanded by the market, rather than simply hoping gold reserves would automagically align with it.
"One reason that Congress created the Federal Reserve, of course, was to act as a lender of last resort. Why did the Federal Reserve fail in this fundamental task? The Federal Reserve’s leaders disagreed about the best response to banking crises. Some governors subscribed to a doctrine similar to Bagehot’s dictum, which says that during financial panics, central banks should loan funds to solvent financial institutions beset by runs. Other governors subscribed to a doctrine known as real bills."
I've never seen any source other than you say that the great depression was caused because the Fed couldn't create money.
Attributing that to any one thing requires a large amount of evidence. For example, Americans spend a much larger percentage of their income on housing than they did in the past.[1] House prices vary wildly based on local because of demand and local legislation that affects how and what can be built. How much of that is because of increased housing cost, and how much of increased housing cost is because of monetary policy which is national and not local conditions, when prices vary so much by locale?
If you're trying to make a case that the middle class has less savings because of reasons other than that, it seems prudent to at least explain that away.
And the rise in housing prices is a bubble created by monetary inflation. Asset prices increase first when money is created. Houses are one of the many safe havens that people put their money into when the economy has poor investment and savings options. Monetary inflation also fuels cheap loans that inflate these assets and get people into long term debt obligations - because money is largely created by giving out loans. This is all part of the same problem.
>Monetary inflation also fuels cheap loans that inflate these assets and get people into long term debt obligations
You're forgetting something extremely important here. It's the savings that are fueling cheap loans. Those savings force the Fed to lower interest rates. It's not the Fed that is making this decision, it's the market collectively deciding that depositing money and lending it out is the best use of their money and those savings have to go somewhere.
Before 2008 those savings were flooding into mortgage bonds and banks ran out of mortgages to sell so they just took subprime mortgages and got the rating agencies to lie for them. All for that sweet sweet commission.
> the market collectively deciding that depositing money and lending it out is the best use of their money
I don't think anyone thinks that earning bank interest is the best use of their money. Interest is basically 0. In some countries you have to pay to hold deposits in banks.
> those savings have to go somewhere
They actually don't. We could legislate 100% reserve requirements for example, instead of the 0% we have today.
> Before 2008 those savings were flooding into mortgage bonds
I think you're misunderstand how banks operate these days. Banks no longer lend out proportional to the deposits they get, banks lend out as much as they can without any limit. The amount people are saving is literally irrelevant at this point. It was already basically irrelevant in 2000. https://www.newyorkfed.org/research/epr/02v08n1/0205benn/020...
> And the rise in housing prices is a bubble created by monetary inflation.
That doesn't account for the vast difference in price based on locale. Inflation is not locale based, but housing prices definitely are.
I don't doubt that monetary policy affects housing, because it makes it easier to get loans which will affect demand, and thus pricing, but it's not the whole story, and may not even be half the story depending on the area. For example, another thing that affected demand is urbanization. But, interestingly, the rate of urbanization seems to have decreased since the 1970s (and in some regions actually regressed in the 1970 in total, not in rate of change).[1]
I think this needs to be accounted for in any coherent theory that tries to link monetary policy to lack of savings now compared to the past, when we already know that housing prices have risen much faster but that housing prices are also extremely locale based, which monetary policy isn't.
Ultimately, while I think monetary is powerful in how it affects myriad things, I think we would be remiss to use it as an explanation for everything just because it's easy to point to. Most things are far more complex than that and have many inputs that affect them, and without careful examination we can't be sure if monetary policy was the majority of the reason, or even the primary reason.
Housing is one of the _very_ few ways a peasant can leverage debt beyond his means to hedge against inflation.
There's no other way I could take out a loan for > $100k to buy an asset. Since leveraging dollar debts to assets is the only sane thing to do in an inflationary regime, it's no surprise that housing has become ridiculously overpriced.
Buying a house is the only way an average person can utilize financial techniques of the wealthy. Namely leveraging dollar debts against an inflationary hedge.
Because the cost of living is set by what other people spend. If I earn $3k a month and my neighbor earns $3k a month, and I want to save $300, I only have $2700 to spend. My neighbor can offer more for limited resources (housing), and thus I can only save if I don't have to pay for that housing.
Inflation benefits those that can leverage dollar denominated debts against inflationary hedges. Wealthy people with assets undoubtably can do this at a grand scale while the closest thing an average person can do is buy a house.
2. Outsourcing of manufacturing begins in earnest (combined with weakening of unions, the Clean Air and Water Acts, etc)
Yes, and maybe slower globalization would have been better, but I personally am a free market all the way guy.
3. Computers really start taking over (obviously accelerates in the 80s)
This is akin to making the `pie` that is the economy greater. It does does not explain why the wealthy gained most of the new growth of said `pie`.
4. Women started having real careers on a large scale
I'm a bit torn on this as an argument. Women having careers should have increased the size of the economic `pie` and everyone should have been better off, but what seems to have happened is that competition between laborers became more intense and while the `pie` grew, the average person lost a significant portion of their share.
I have yet to fully wrap my head around this one, but it seems like labor competition combined with corporate and or governmental control in a way that prevented the distribution of the increased productivity?
> 3. Computers really start taking over (obviously accelerates in the 80s)
> This is akin to making the `pie` that is the economy greater. It does does not explain why the wealthy gained most of the new growth of said `pie`.
Sure it does. The productivity gains from any tool are a direct monetary benefit to those who implement it. The pie is only subsequently redistributed if other market effects coerce the original beneficiary into doing so.
Record-keepers, secretaries, etc, being laid off from their job obviously have no opportunity to negotiate for higher wages as a result of that productivity gain. The only people who were in a position to negotiate were the ones who could implement these new tools. And they did: tech jobs are well paid.
How does inflation suck money from the poor? That is, the ones who are most likely to have loans that will be reduced by that very same inflationary policy.
To a degree you have to have something to put up to have a loan in the first place.
The finances of some freshly minted doctor loaded with medical school debt look a lot different than an unbanked poor person who's never qualified for credit.
> How does inflation suck money from the poor? That is, the ones who are most likely to have loans...
why the hell is this still a belief? The indebted poor have revolving credit at best (think 10%-ish APR) or short-term credit (payday loans: 15%+ APR). Inflation does not help those situations.
The wealthy are benefitting from low-interest rate loans (margin accounts, leveraged trading, options) that are enabled by the existence of inflation, and by the mechanism, which is providing a discount window to banks (so they ride on nominal gains and are insulated from real devaluation).
Consider someone who is spending 95% of their income on day to day expenses, and we have a 1% increase in prices. Now you are spending 96% of your income on day to day expenses, which is a 20% decrease in margin of safety. It's even worse if you start at 99%.
If you are spending 20% of your income on day to day expenses and have a 1% increase in prices, your margin of safety loss is < 2%.
"But wages catch up" you say. No they don't. Otherwise inflation as a policy doesn't work.
"in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts."
Inflation is a stealth wage cut, a matter of policy for cheating the labor class. Don't get me wrong, it's well intentioned - it's to prop up the low unemployment metric, but Goodheart's law applies.
Finally, inflation forces the middle class to invest instead of save, to stay afloat and build up a retirement nest egg. Investments typically must go through approved channels, e.g. "the stock market" which disproportionately favors the already wealthy, e.g. CEOs, investment managers, hedge funds.
Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
> Finally, inflation forces the middle class to invest instead of save, to stay afloat and build up a retirement nest egg. Investments typically must go through approved channels, e.g. "the stock market" which disproportionately favors the already wealthy, e.g. CEOs, investment managers, hedge funds.
If only there was some common investment vehicle, a 'shelter,' if you will, that could shelter you from inflation while simultaneously sheltering you from the elements?
They did until a series of fiscal policy (tax and spending) changes in the 1970s and 1980s (including the massive Reagan tax burden shift onto workers) put the kibosh on it. Since then, not so much, but that’s not a monetary policy issue, insofar as those two things have been artificially segmented.
> Inflation is a stealth wage cut, a matter of policy for cheating the labor class.
You are misunderstanding the Krugman quote. The value he is citing is that as there are demand shifts in the economy, inflation allows small short-term real wage cuts in segments of the economy seeing decreased demand and therefore profitability without reducing nominal wages (whumich tend to be sticky), reducing resort to job cuts as a response, providing a buffer between short-term fluctuations and unemployment.
Krugman is not saying that inflation enables long-term, general real wage cuts to be more easily implemented or that it would be good for it to do so.
> Finally, inflation forces the middle class to invest instead of save
The middle and upper class are, by definition the clases with substantial dependence on the returns from productive capital. Inflation doesn't force the moddle class to invest in capital, substantial investment in capital while still having a dependency on your labor is what defines being middle class. You can choose not to invest in capital, whether by stuffing money in a mattress or blowing it on hookers and blackjack, but if you do that you aren’t middle class.
> Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
No, the siphon that does that is the series of tax burden shifts adopted over the last several decades with the express design of rewarding/encouraging the wealthy (often euphemized as “job creators”).
> Krugman is not saying that inflation enables long-term, general real wage cuts to be more easily implemented or that it would be good for it to do so.
You're right, that's not what he's saying. That doesn't mean it's not happening.
Fact of the matter is that we can't decouple the "shifting of the tax burden" from the detachment of the dollar. However, we will soon find out. Biden is shifting the tax burden back, and we're gonna get inflation. My prediction is that in 10 years the lower and middle classes are going to be absolutely reamed by both of these and the upper class will be unscathed or even richer (lower class due to inflation directly and middle class due to bracket creep + taxes intended for the wealthy). Your prediction should be that income inequality will be ameliorated. We'll see who is correct.
> The indebted poor have revolving credit at best (think 10%-ish APR) or short-term credit (payday loans: 15%+ APR). Inflation does not help those situations
Forcing down inflation raises interest rates, and lower interest rates help the significantly indebted a lot. Interest is literally a siphon that takes wealth from people that are earning it and gives it to those who already had it.
And the debt to wealth ratio of the bottom wealth decile of the UK is 3:1
The debt to wealth ratio of the top wealth decile is, obviously, a lot smaller. They might borrow when it's tax efficient to do so, but they don't need to. Also lower interest rates actually reduce the returns they're getting on lending their money. Sure, low interest rates don't hurt their property portfolios, and are fantastic for people becoming rich by starting companies that burn through a lot of borrowed cash (and create jobs), but in general interest is a subsidy for the rich.
Forcing down inflation requires raising interest rates as a policy, yes, and that will result in people offering LESS revolving credit, which will decrease the net flow of the siphon. But seriously if you think 2% inflation helps out your credit card at 10% APR... Maybe you should start maxing out your credit card?
> The debt to wealth ratio of the top wealth decile is, obviously, a lot smaller
That's not obvious to me. Donald Trump is probably in very poor shape debt-to-wealth-wise relative to myself. The unbanked in the US are doing literally infinitely better debt-to-wealth-wise than I am.
Anyways, you are strictly thinking of personal debt. There is institutional debt that the wealthiest have either indirect access to, or benefit disproportionately from, for example corporate debt, if you are in the C-suite, or municipal debt, if you own a firm that is frequently obtaining grants to do stuff, or literally banks, if you are a major shareholder in banks, financial instruments that require low-interest debt, if you participate in a hedge fund, etc.
>The wealthy are benefitting from low-interest rate loans (margin accounts, leveraged trading, options) that are enabled by the existence of inflation,
Low interest rate loans exist because of low inflation. If there was high inflation and full employment those rates would go up very quickly.
>Consider someone who is spending 95% of their income on day to day expenses, and we have a 1% increase in prices. Now you are spending 96% of your income on day to day expenses, which is a 20% decrease in margin of safety. It's even worse if you start at 99%.
Your employer also has now room to pay you 1% higher wages.
>"But wages catch up" you say. No they don't. Otherwise inflation as a policy doesn't work.
They do with full employment. Inflation only exists to erode the value of income earned in the past to encourage investment. To make sure those investments pay off, inflation also raises future incomes.
>Inflation is a stealth wage cut, a matter of policy for cheating the labor class. Don't get me wrong, it's well intentioned - it's to prop up the low unemployment metric, but Goodheart's law applies.
It's a hack to get to full employment. Once you have full employment workers can negotiate for increases that catch up with productivity, which today would go well above the current inflation rate.
>Finally, inflation forces the middle class to invest instead of save, to stay afloat and build up a retirement nest egg. Investments typically must go through approved channels, e.g. "the stock market" which disproportionately favors the already wealthy, e.g. CEOs, investment managers, hedge funds.
If the USD in your bank account don't represent wealth in the physical world they are effectively worthless. You're also forgetting that those investments will create jobs and some of those jobs are middle class jobs.
>Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
Ok, tell me your magic solution to achieve full employment and letting wages catch up with productivity.
Its called Seigniorage. The people and businesses closest to the money creation gain more from the creation of the money. That's because when new money is first used, prices haven't accounted for it yet. It takes a lot of time for that to happen. So by the time that money has trickled down to the masses, prices have inflated to account.
Not only that, but that money is very often used to fuel government debt, which only leads to paying more money later down the line. Debt rises faster than inflation dilutes the money supply, so its simply not true that we can simply print enough money to devalue our debt. The more money we print, the more in debt we'll collectively be.
The rich have large leveraged loans, mortgages, and lots of assets - ideally situated to benefit from inflation and are not impacted by the price of food or rents.
In contrast the poor typically have small loans, rents and rely on wage inflation, which usually trails price inflation by some way.
I don't know that the poor were any better off before the Federal Reserve system; in fact, it made the possibility of monetary rescue even more exclusive.
Part of the reason why the Federal Reserve was formed was because in 1907 J.P. Morgan got his boys' club together and coordinated a financial rescue, but tough luck if you weren't benefitting from that.
Letting things fail is a possibilty. The boys' club can get together and coordinate a rescue, but in one out of every n attempts of coordinated rescue, they'll fail. Which will be good for leveling income inequality.
I wish there was more rigorous discussion of monetary economics - or economics in general. Most people are economically illiterate, and economists are doing a real bad job of teaching it. The most famous ones seem to be constantly on the bleeding edge of whatever semi-verified theory they've pushed for decades without considering that they might be wrong sometimes.
> Which directly leads to instability when the value of the backing changes.
You're not correct. Instability leads to changes in the buying power of currency, not the other way around. Unless you're talking about monetary inflation. What mechanism do you think there is to change the value of gold in a gold-backed world? The mechanism is that when there are better places to put your money than keeping it in dollars (gold backed or otherwise) the value of those dollars goes down. And vice versa, when there are fewer better places to put your money, more wealth will be held as currency and push its price up (this is why deflation is seen as bad - beacause it generally coincides with an economy that has been invisibly failing for years).
Monetary policy had been inflationary and insolvent, and rampant expansion of the money supply lead to high price inflation which of course ended in a crash. It was monetary expansion that lead to the problems in the 70s not mysterious changes to the value of gold.
Pretty sure the value of gold only truly fluctuates against fiat currencies. It's not the intrinsic value of gold that fluctuates. In Roman times the value of an ounce of gold would buy a handmade robe, belt, and shoes. At today's value $1800, you could do exactly the same.
> Since 1971, unfettered monetary inflation has been used to siphon wealth from the people for the benefit of a segment of rich elites close with the federal reserve.
The median household debt is $90,460 in the US, and the median savings is significantly lower than that. So barring hyperinflation, some reasonable inflation is actually beneficial for 'the people.' It's diluting their debt. Meanwhile, the most common investment for working people is in their home, and real estate is one of the best inflation shelters.
The parties most harmed by inflation are the ones sitting on huge amounts of cash without using it productively (so, not 'the people'), and those are exactly the parties who need a fire lit under them to prevent a deflation spiral.
Here's the problem I own a home I am not owning that home as an investment vehicle I didn't choose the home to make a return I got that home as a place to fricking live, I chose my home because it would be most comfortable for my wife and family. The "value of the home" is an imaginary number in a database somewhere that doesn't actually do me any good when I need to pay for a hospital visit, or need to buy a car or something like that.
In fact the more of my "value" is locked up in my home the less I am able to access it. Besides even if I were to liquidate what should I do then, go live under a bridge, the problem is even if my home has increased in value so has everyone else's home so even if I liquidate I'll still be stuck having to roll all that value over into a new home anyway because no matter what happens I still need a place to live.
It's the easiest way in comparison to losing physical access to the property by selling or renting it out. Equity lines of credit are very easy, they're not free money but then again TANSTAAFL.
Yes, increasing land prices are stupid. The idea that people are investing into land is absurd.
This is actually an example of deflation hurting the poor. It's not deflation of the USD. It's deflation of land as people start hoarding land and reduce the available supply. If we could "print" more land this wouldn't be a problem.
It's like those game item NFTs. ETH goes up by 4x. Items get more expensive by 4x. It's just stupid.
I'd suggest those most harmed are those with little to no savings (>75% of US population according to Statista) and simply pay higher prices year over year.
Don't wages generally go up with inflation too? If you have no money saved to devalue, how are you harmed? If you have debt, you are helped. It seems like the cases where you would have harm is if you have savings and/or you do not get a raise to help with inflation, and little or no debt in both cases.
The article you linked seems to be saying the opposite:
> In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago.
Having the same purchasing power means that wages have indeed kept up with inflation. If they didn't, it wouldn't be the same purchasing power, it would be diminished purchasing power.
Excepting that the `pie` that is the global economy of goods and services has grown significantly. So in this case, we're all producing more than ever, but not gaining any more than we used to.
It's relative to who you consider as 'we.' If you mean workers in the US, yeah it's pretty flat. However if you mean 'we' to be workers globally, we've gained a staggering amount in the past few decades. Somewhere in the neighborhood of 1.5 billion people have been lifted out of extreme poverty in our lifetimes[1].
What's missing from any analysis that only considers CPI is that price inflation doesn't take into account decreasing costs of production. Technological progress and innovation should be driving down prices of quality-adjusted products. So the fact that wages adjusted to inflation are staying constant indicates that there is downward pressure on wages of a similar rate to the rate at which general market costs are decreasing. In a world with no inflation, what we would see here is decreasing costs, decreasing wages, and increasing GDP.
What's also missing from this analysis is that CPI doesn't adequately incorporate important things like that the quality-adjusted price of housing has massively increased at much faster than the general rate of inflation.
> So the fact that wages adjusted to inflation are staying constant indicates that there is downward pressure on wages of a similar rate to the rate at which general market costs are decreasing.
Isn't that a simplistic point of view that assumed the U.S. is either a closed system or the rest of the world as progressed at the same rate we have?
There's more global competition now, both for customers and for jobs. That wages have stayed inline with inflation in spite of the fact that America has shifted quite a bit to a services economy and those services have competition from other countries (the classic example is India), may actually point to the monetary policy preventing what would be a much worse problem, and for nothing to do with inflation.
It's easy to pick one metric and paint a picture that supports a story. It's much harder to account for many important factors, which is also why it's not done as frequently.
Anyone's theory that one specific thing is the result of many major worldwide changes is going to have an uphill battle with me. The time frame we're talking about includes the popularization of the internet, increased globalization, the recent aftermath of the civil rights movement, an over 100% increase of global population compared to a ~60% increase in United States population, and mode than halving the number of people in the world that live in extreme poverty.
Every single one of those would have massive effects on the economy, production and wages of the United States. I'm not sure how anyone could credibly make claims about how monetary policy in the U.S. was the reason for effect over the last 50 years without accounting for these and other things. It's easy to point at two things that seem to correlate over time. It's much harder to prove causation.
> those services have competition from other countries
That absolutely might have an effect on wages in the US. However, its unlikely that real GDP would be unaffected while real wages stagnate in such a case.
> I'm not sure how anyone could credibly make claims
Lots of things happen in the world all the time in every decade. The internet isn't any more novel than electricity was or the industrial revolution was. Yes there are a lot of confounding variables that make it difficult to make empiracle conclusions. But the largest market manipulators (central banks and governments) do play a substantial role in macroeconomics, and its completely fair IMO to conjecture around the effects of those things using logic and theory.
Yes, but wages are "sticky" and lag in the rise. Statistically, it should work out fine. As a curious tangent, I've been reading that we will be entering stagflation soon as we continue with inflation and as people re-enter the workforce en masse wages will be driven down.
Devaluing the debt definitely helps, but I think you noted before that that wealth is largely inaccessible.
>I've been reading that we will be entering stagflation soon
No, we have stagflation right now. Stagflation is generally the type of inflation where production cannot follow demand. This is generally caused by supply shocks and sometimes by legislation that prevents people from working. The semiconductor shortage is causing a lack of new cars and thereby an increase in used car prices is an example of stagflation because prices go up but nobody is employed in the process to produce more cars.
However, this stagflation is unlikely to last because those car CEOs sure as hell don't want their company to go bankrupt. They'll pay more for preferential access to semiconductors and make their JIT manufacturing more resilient.
Wage increases can be part of the driver for general inflation, but they definitely tend to (unequally, though) be produced by it. However, when they aren't pushing inflation, they tend to be at a overall level less than inflation (when one cobsiders the effects of inflation alone, which is hard, because its never the only real factor), and (absent pushes like minimum wage increases) may entirely not occur in some segments.
> when one cobsiders the effects of inflation alone, which is hard, because its never the only real factor
To me, that's the real thing I think it missing from a lot of the discussions going on here. There are so many things that go into these as inputs, and over this time period, so many large global changes. It's hard for me to take some of the claimed causal relationships at face value without even lip service to some of those other things (globalization, increase in population but unevenly, social upheavals, etc).
> and (absent pushes like minimum wage increases) may entirely not occur in some segments.
Yeah, I don't expect it to be simple. In fact, the assumption that it's not simple is why I'm having trouble accepting some of the direct claims presented as they have been so far (which is without much analysis of additional factors).
Generally they do yes. Average wage in 1970 was about $3.40 an hour, which is about $23.60 today when inflation linked.
Today average wage is $25.60/hr
But that's only part of the story - while wages haven't gone down over the last 50 years, the economy has increased, and normal people haven't benefited from that increase unless they've been able to pump their money into things like stocks. That means those who had wealth and no debt back in 1970 are doing great (put $1k in the Down Jones in 1970, reinvest the dividends, and instead of an inflation linked $7k, you'd have a whopping $260k today)
This means that boomers (the ones with most of the wealth and control) are very rich, but Gen-X and especially millennials are massively lagging behind where previous generations were.
> normal people haven't benefited from that increase unless they've been able to pump their money into things like stocks.
Except that the U.S. isn't cut off from the world economy, and over a billion people have moved out of extreme poverty. How much of the difference in what we expect buying power should be compared to what it is is on account of globalization and sharing some of that wealth with other countries? It seems a bit suspect to assume monetary policy is the only or the majority of the reason for these observations without considering things such as that.
Under a gold standard, you'd be lucky to get the 1% gain in value on the $250k house, and due to the relative scarcity of money the billionaires would be making a lot more on each dollar they lent you.
You think that centralizing the global economy around a metal that has limited intrinsic value, limited supply, relatively high density, random allocation below out earth’s surface, and extremely high storage costs is a good thing for poor people?
I think strictly limiting the ability for central banks to inflate the monetary supply (and use that created money to their own ends) is good for poor people. If it requires centralizing the global economy on gold, I certinaly think it would be worth it. However, an alternative would be to simply renationalize the Fed and put legislated limits on dollar monetary inflation. There are a lot of options here that don't involve going back to a gold standard.
It kind of sounds like your argument is "gold is expensive, so how could it be good for the poor". Is that.. really the argument you're trying make here?
> simply renationalize the Fed and put legislated limits on dollar monetary inflation.
Nothing simple about that though since the current system benefits the most powerful.
This _is_ why bitcoiners treat it like a religion. There is no traditional political way to return to sane monetary standards. Moving to BTC removes the untrustworthy governmental control from the equation.
Bitcoin's energy usage is only necessary as a hedge against powerful actors trying to kill it. Proof of stake currencies are great, but it's likely if bitcoin hadn't paved the way, any such system would have been killed by a state actor since it hurts their main source of finance.
Indeed. I meant its a simple idea. It would be simple to write a lwa for it. But of course, it would be politically fraught. Similarly tho, it wouldn't be politically simple to switch back to gold-backing.
But yes, hopefully bitcoin can save us from this mess one day.
No, the argument people are making is that the interest rates associated with forcing inflation down further increase the returns the wealthy make lending money and the price the poor and people creating jobs for the poor pay to borrow money. We already have a legislated inflation target: it's 2%. We tried screwing around with raising interest rates to whatever level was necessary to try to hold absolute dollar amounts below a certain level instead in the early Reagan years and it was a quickly-abandoned disaster.
The argument that imposing restrictions on the quantity of new assets the rich have already have lots of and the poor don't and need to borrow them would benefit the poor is the economic equivalent of positing a flat earth
Fair enough, strictly speaking their legislated objective only includes "stable prices" as one of their goals, but their publicly stated policy target of 2% is regarded as consistent with that legislated objective. The Bank of England's legislated objective is "price stability" alone complete with statutory responsibilities to justify all its actions in relation to that, which is also considered to be consistent with a 2% target.
For the Fed (can’t speak to Bank of England), it has in legislation what is frequently referred to as a “dual mandate” of “maximum employment, stable prices and moderate long-term interest rates.” [0] The 2% Fed target explicitly is justified as balancing stability and employment.
The ECB also has a 2% target, and its asymmetric explanation of stability may explain it: “By stable prices, we mean that prices should not go up (inflation) significantly, and an ongoing period of falling prices (deflation) should also be avoided.” [0]
Note that they define stability as avoiding signficant inflation and also avoiding significant periods of (even small) deflation.
The bias towards inflation exists because it can reduce the real interest rate below 0%. Lowering interest rates below 0% is not practically possible. If we could hit negative interest rates deflation wouldn't be such a big deal.
If we could have negative interest rates, deflation would still happen, and people would still label it as a harbinger of bad economic times. Why? Because price deflation of a monetarily inflating currency is a symptom of an unhealthy economy. When the currency becomes a more attractive place to keep your money, it means the rest of the economy has become significantly less attractive - ie unhealthy. Deflation itself isn't what's a big deal, its the cause of deflation that is a big deal.
> The bias towards inflation exists because it can reduce the real interest rate below 0%
And why would we want such a thing? With real interest rates below 0, everyone could take a loan out, sit around and do nothing, and then collect money from the "lender" later.
> imposing restrictions on the quantity of new assets the rich have already have lots of and the poor don't and need to borrow them would benefit the poor
Honestly its too hard to figure out what you mean by that to really respond. How is this related to what I said?
>Is that.. really the argument you're trying make here?
No? My argument is gold is a wildly impractical currency that does not align with the goals of contemporary society (new supply is randomly distributed to land owners, its extraction ruins valuable natural resources, it requires a significant amount of fossil fuels to move, etc.)
I really wonder, why when the average low-income American is in nominal debt at fixed interest rates [0] that HN thinks inflation is bad for them (it is in fact bad for upper middle class savers like the majority of HN, so maybe that's why).
Ok. Yes, gold does have those downsides, I agree. The upside is a limited supply and therefore limited ability to inflate the supply.
> why when the average low-income American is in nominal debt at fixed interest rates [0] that HN thinks inflation is bad for them
Many reasons. Monetary inflation doesn't just lead to devaluation of the currency - it doesn't just hurt lenders and holders of dollars. Monetary inflation extract Seigniorage from the people. Prices rise before wages, leading the poor to get poorer. The money is used by banks to extract interest from people they give loans to. Read my other comments on this thread tho. I'd rather not rehash it yet again.
Source? This Chart [0] seems to show they at least move in tandem (with wages maybe having the slight first mover edge).
>The money is used by banks to extract interest from people they give loans to
Again, I think you're poorly sourced. As sourced in the last comment, in the bottom 50% of US households, credit card debt is 50% of total debt (higher for lower percentiles, but the FED doesn't break that out), and as this chart [1] shows, credit card debt is priced independent of inflation.
Where are banks using inflation to exploit the working class, exactly?
Store prices can be adjusted as often as once a week, but wages are generally adjusted only a couple times per year. So it makes sense that wages lag prices.
> This Chart [0] seems to show they at least move in tandem
They should move in tandem at wide granularities. But there's way too much noise in the chart to really be sure of anything from it. CPI is constantly tweaked, so its hard to even give much meaning to how the line moves throughout this chart. And why just hourly earnings here? There's lots of places that look like one leads the other and vice versa, but it may just be noise. There's too many confounding variables.
> Where are banks using inflation to exploit the working class, exactly?
I mean, I'm going to throw in the towel at 'the data you show isn't right, but I have no alternative and also here's a different unsourced/somewhat ill-informed comment I made'
My intuition is the opposite of what you're saying. Inflation devalues debt and savings while increasing the nominal value of wages. The guy with hundreds of thousands in savings and bonds loses from inflation; the guy with $80,000 left on his mortgage working as a senior sales associate at Home Depot benefits from it. How does this siphon money from the people to the benefit of rich elites?
Because the inflation grows in respect to the access to captial you had before.
So our Senior Sales associate at Home Depot doesn't see any real increase because he doesn't have any assest to take advantage of it.
Meanwhile those that have access to cheap money are able to move it to others sources that are inflation resistant, stocks, companies, real estate, etc, meaning that overtime he is still getting paid $80,000 and his house may have increased in value but everything he needs to live is outpacing his ability to buy. Meanwhile those involved in finance are now substantially richer because they got more of the new money being created by having easy accless to captial.
EDIT: If I am wrong in something here somebody tell me why, because that basically seems to be what is happening with the feds inflationary money policies is that everyone that can is borrowing at low interest rates then plowing that into real estate and the stock market because those are increasing in value so much, precisely because interest rates are so low and inflation so high.
>IT: If I am wrong in something here somebody tell me why,
Because wages rise with inflation too. A very simplistic explanation is that inflation hurts those that save/lend cash and helps those the own assets & borrow cash. It tends to be the poor that suffer because they save in cash & it's easier to suffer as a poor person.
That's the opposite of what your link shows. While wages have not kept up with growth in the economy or overall productivity, they have absolutely "kept up with inflation," and a tiny bit more, i.e., the average wage has the same buying power now (or a little more) as the average wage had decades ago after adjusting for inflation.
Given enough inflation you will eventually get full employment and wages will catch up with productivity increases. If you have 1% inflation for a decade the economic system is going to fix itself eventually but it's going to take forever, which is why anti inflation sentiments have built up as people get used to the new normal and are scared of change.
For example, if I have a debt of $250k for a house worth $250k and inflation is causing a net benefit on my asset of 1%, then sure I'm gaining from the inflationary regime.
But what of the wealthy that have billions in assets and maybe even billions in debts?
The two situations belie a completely regressive tax. The billionaire gains net 1% on their billions and I as a peasant gain net 1% on $250k.
How can you argue this doesn't generate wealth for the wealthy?
Consider further that 1% is a modest number for the net benefit of asset backed debt.
>The two situations belie a completely regressive tax. The billionaire gains net 1% on their billions and I as a peasant gain net 1% on $250k.
It's a regressive tax in that the person with $250k gains less in absolute terms than the billionaire. But that's just capitalism. But so what? Everyone's still better off than they were yesterday.
This also ignores the spending effects and money velocity increases inflation brings. This is why the Phillips curve is a thing. People are encouraged to spend money. Higher inflation->lower unemployment. Lower unemployment, more bargaining power, more wages, the marginal person is better off.
There's a reason why low inflation is correlated with the Regan era of corporate takeover. The wealthy today don't actually own physical assets, by and large. They own financial instruments. They'd like to be able to sit on them. They don't want to have powerful labor. Stagflation is what happens when there's an exogenous shock to the labor supply by the opening of the world combined with the oil crisis. Now you don't need more people to produce more stuff.
It seems to me that, currently, entry-level wages are rising faster than inflation. It isn't uncommon to see retail or fast food hiring signs advertising starting wages 2x as much as what I earned in those jobs 20 years ago -- over which time cumulative inflation has been 52.1%.
Do you think the reduced labor participation rate due to COVID-19 has made the entry-level labor market more responsive than the Cantillion Effect presumes?
That site is not trustworthy because they just add a constant to existing government numbers.
Let's get real. Every statistic has a tracking error. The CPI will always be wrong because that is the nature of measurements. However, it's not so crappy that it is off by more than 1%.
Inflation usually happens with full employment. One problem is that inflation can also drive full employment, therefore the interest rate has to act as a moderator to prevent the economy from overheating as people constantly switch jobs for better pay. Lowering the interest rate is only possible because there is slack in the economy and we haven't reached full employment. If there was full employment the Fed would have to raise the interest rate because the market demands a higher interest rate but that is not the case right now.
The problem with the Cantillion effect is that the way its usually explained there is an eventual trickle down.
There probably was a trickle down Cantillion effect in his time since in the 1730s rich people would one way or another buy other people with their money.
These days it is trickling down to Google SWEs who the rich people can use to build machines to put the grocery checkers out of work. I don't think its trickling down to the grocery checkers.
So the Gini coefficient keeps increasing, rather than leading to broad inflation.
Eventually the bottom half of the economy should be effectively priced out of it, at which point we should see a deflationary collapse in the top half.
This is correct. The associate would need their compensation to be rising at the rate of inflation (which it certainly wont) in order to take advantage of increased purchasing power vs their debt. If rich person xyz has a net worth mostly denominated in assets that at least keep pace with inflation they can take out fixed rate debt and inflation will devalue it in -comparison- to their other assets.
There is more to inflation than the value of the currency. Price inflation generally comes from monetary inflation - growth in the money supply. Where does that created money go? Who gets that money? What does it fund? These questions are at the root of the issue.
Yes, price inflation reduces the value of debt. However, it also means there is a pretty big disincentive to save money. When you take away an easy avenue for the poor to save money, those people have one less easy way to save for their future.
But to the question of who gets the money, this is the concept of seigniorage. The people closest to the money creation get the most value from that money. That's because when that new money is spent, prices haven't accounted for that monetary inflation yet, so they have higher buying power than they should have. When that money trickles down to the rest of us, that money has already lead to devaluation of the money that results in price inflation. In practice, banks, financial institutions close to those banks, and governments get the most benefit from this created money.
But this is also a zero sum game. Creating more money doesn't create more wealth. The more currency you create, the lower the value of the currency. So where does the value gained in seigniorage come from? Well it comes from the people farthest away from the hose: the poor.
This is why the monetary inflation leads to price inflation means prices go up before wages go up.
There's even more to it than this. Its a complex topic. But I hope you see where the iceberg might be.
Seignorage revenues are distributed amongst ordinary people borrowing money who benefit from lower interest rates rather than being captured by those who own gold mines. Takes a remarkable degree of cognitive dissonance to argue granting them to the latter group would be a more progressive approach.
Yeah the flaw is that if the rich get the money early and don't generate inflation, it implies they haven't spent it and thus do not significantly benefit from inflation. They may have gotten a greater share of all USD but they haven't redeemed that share in a way that takes resources away from the poor.
If they spend it, poor people would still benefit because the spending is creating jobs in the process. Really, the only problem is land ownership (renting out buildings is fine) and that has nothing to do with inflation, rent seeking is a fundamental problem that drains productivity from the economy.
Renting land is actually not "rent seeking". Tho I can see how people make that association. Rent seeking is specifically the act of manipulating pulic policy to gain more money without providing anything in return.
The money isn't given and isn't targeted at "the rich" anyway. It's lent, with interest. If it wasn't lent, people would have to borrow money from the [mostly] rich, at higher interest rates, so in that respect the rich actually lose a subsidy.
Sure, some rich people take out loans (but have to pay it back, which often they do by spending the loan on stuff that creates jobs) and some benefit very indirectly from asset prices rising. But as a general rule the poorest demographic borrows more than they own and lends absolutely nothing, and the richest demographic borrows less than it lends, and sees returns to its lending fall
Ok, well sort of. The consequences of seigniorage are afforded to those that spend the money earliest, including borrowers if the money borrowed is newly created money. However, the borrowers are paying for that privilege. And everyone else is paying for that privilege down the line. IE the borrower pays interest well in excess of any seigniorage realted benefits, the people or companies he pays with that loan money are selling things to him at a lower rate than they should based on the increased money supply (becuase that information takes time to propagate through the market), so when they spend the money, they have already been taxed.
But most banks aren't the originator of that money. The Fed creates money, all other banks lend it out which causes a money multiplier effect. However, the money multiplier doesn't actually affect prices directly - beause most of that money are deposits, ie they're not being used. Money only leads to price inflation when its spent. Banks gain seigniorage by having first access to money lent out or spent by The Fed. If they need extra money to cover for too little deposits, The Fed is there to give those banks below-market-rate loans. If the government needs to borrow more money and banks don't have enough to buy the bonds, The Fed will buy bonds from banks at above market rates so those banks can buy more bonds with the money they get back from that. That's where the seigniorage happens.
There are also financial institutions that banks give benefits to (cheap loans for example). Those financial institutions also benefit from seigniorage by getting those cheap loans. Ordinary people aren't getting cheaper loans tho. If anything, the monetary inflation pushes loan rates up, even as nil resere requirements and a low discount rate have pushed them down.
The way you describe it, it seems that if increases to the money supply were driven by fiscal spending on government programs benefiting the poor and middle class, rather than being driven by monetary action by the Fed, then the poor and the middle class would be the primary beneficiaries of inflation, being as they would be closest to the hose, as you put it. Would you not agree?
Government programs that benefit the poor and middle class benefit the poor and middle class, by definition really. But since the government is taking this money out as a loan, they need to pay interest on it. The interest they pay is certainly higher than any Seigniorage benefit they get. So the loan (where paying interest is required) is essentially the wall past which Seigniorage no longer benefits the receiver - unless they're getting a below-market-rate loan. Even if the loans were below-market-rate, or 0% interest, this government spending of money that isn't collected in taxes is a recipe for disaster. Eventually, the tax payers (who are primarily the middle class) will pay for it. And often the things the government spends money on are not very efficient, so deficit spending is extra bad in those situations.
> Government programs that benefit the poor and middle class benefit the poor and middle class, by definition really.
Well, of course. But what I was inquiring about was with regard to what would happen if such spending was not financed through deficits but was funded instead by direct money creation, while at the same time money creation by the central bank, etc., was proportionally diminished.
If all or most new money originated from entitlement spending (money printed for that purpose), how would that change the inflation dynamic?
> what would happen if such spending was not financed through deficits but was funded instead by direct money creation
Theoretically it would be better because you wouldn't need to pay a fee (interest) to middle men (banks). However, it would also be potentially a lot more abusable if congress could just create as much money as they want. Arguably the Fed now is abusing this ability anyway, so maybe it would be at least no worse if the government could do it directly.
> how would that change the inflation dynamic?
Well, devaluation would still happen, so the market distortion that incentivizes bad investments and removes an avenue for saving would still exist. If banks continue to lend out more money than they have, then we'd still have a debt cycle of booms and busts. However, the taxpayers would save money. The people gaining from Seigniorage wouldn't change much - whoever the government gives funding to would be gaining from seigniorage, with the same wealth sapping effects from the rest of the population. It might be a reasonable improvement.
The real problem is that the Fed isn't powerful enough. It can only set the interest rate and it can't even set it below 0%, it cannot decide how to distribute the money. The only one who can do that is the US government. Republicans hate distributing money fairly because it goes against neoliberalism and people vote for republicans because they believe in austerity at all costs (unless its tax cuts that benefit them personally) and making sure there is a poor group of people at the bottom to provide cheap services.
> The real problem is that the Fed isn't powerful enough. It can only set the interest rate and it can't even set it below 0%,
AFAICT, experts have for years (even before the recent spat of foreign NIRP uses provided additional experience on the effects and raised new questions about whether the Fed would use them) long indicated that the Fed can set and pursue a negative target rate, but has never really shown interest in doing.
The Fed can absolutely set interest rates below 0%. However, elites can't collect Seigniorage rents if they aren't creating new money. There's also the issue of creating so many loans that people can't pay them back without new money entering the system. Our system is based on ever expanding money and debt. It will be painful when we're no longer able to expand these things.
This is one thing I've never understood. If all the money is loaned out to the limits of fractional reserve, more money for interest can only come into existence by printing more.
> If all the money is loaned out to the limits of fractional reserve, more money for interest can only come into existence by printing more.
"Fractional Reserve" banking is not a thing, as banks do not lend out reserves (except overnight to other banks). It does not and has never accurately described how banks lend, nor does it accurately define limits to bank lending. The limit to bank lending is capital. Bank capital consists of trusted assets (e.g. IOUs that central banks are willing to discount or which other banks accept as collateral for overnight loans) that are believed to be risk free. Generally this means government debt. Government debt is the sole constraint on bank lending as well as loan growth. Reserves have nothing to do with this in a modern system, and were only incidentally important in earlier systems.
> more money for interest can only come into existence by printing more.
Please define what you mean by "money". When most people think of money, they think of demand accounts, and these are not created by the government but by the private sector. Clarity in definitions can explain almost all of these misconceptions. A good rule of thumb is that someone who doesn't know what they are talking about mentions only "money". If you know what you are talking about, you specify the asset and matching liability, and so you distinguish between bank reserves, vault cash, deposit accounts, bank bonds, and different bank assets, knowing which meet capital adequacy requirements and which do not.
A good description of how the monetary system works is provided by the Bank of England report "Money Creation in a Modern Economy".
That article does a good job at dispelling myths of "fractional reserve banking", "money printing", and the like, and it accurately describes how modern banks work and what central banks actually do. It is required reading for anyone who goes off about "money printing" or whoever thinks that banks lend out reserves.
> Government debt is the sole constraint on bank lending as well as loan growth.
Are you saying that government debt is the primary asset that banks balance loan liabilities against? I don't quite follow this. Can't a bank simply loan someone money by creating deposits for that person, and balance that against the asset that is the loan instrument? Why does government debt have anything to do with it?
Yup, that's absolutely true. However, there is a limit to this, because debt grows faster than the ability to pay it back, so debt to GDP rises over time. Eventually there is a breaking point.
> It's no coincidence that real wages haven't increased significantly since that Nixon administration.
>> My intuition is the opposite of what you're saying. Inflation devalues debt and savings while increasing the nominal value of wages.
Both statements are true.
Inflation increases the nominal value of wages while simultaneously decreasing the real value of wages, because wages have to chase inflation instead of the other way around. Sustained latency causes this difference to increase against time.
>Since 1971, unfettered monetary inflation has been used to siphon wealth from the people for the benefit of a segment of rich elites close with the federal reserve.
Not deciding to arbitrarily tying the dollar to a random commodity makes the dollar more efficient. I can see how the wealthy disproportionately capture this benefit. However, it doesn't follow that people close to the Fed benefit more than anyone else does. Private equity and venture capitalists are further from the fed than banks, but have grown even faster.
Also, if you wanted to stop inflation, why not just do it another way like forcing a debt ceiling or limiting how much money can be created to a rate similar to that which gold is mined? Tying your money to a volatile commodity seems like the worst way to do it.
> Not deciding to arbitrarily tying the dollar to a random commodity makes the dollar more efficient.
How so?
> it doesn't follow that people close to the Fed benefit more than anyone else does
Its a well established fact that this is the case. Its called Seigniorage. Its called the Cantillion Effect. This isn't controversial in any way.
> Private equity and venture capitalists are further from the fed than banks, but have grown even faster.
Do you have a source for that? Banks are regulated in a way that limits the risks they can take, and therefore the return they can get, so it wouldn't be surprising that banks growth is smaller, especially over short time spans (eg years vs decades). Private equity and venture capitalists are often very close to banks too, so the difference is likely negligible. And I would have to imagine that people who own private equity firms are a lot more likely to also have equity in banks.
> why not just do it another way like forcing a debt ceiling or limiting how much money can be created to a rate similar to that which gold is mined
Yes, why not? I don't think I ever advocated that going back to a gold-backed dollar is the only solution. What was important about the gold standard was that it was a widely agreed upon culture of limited monetary supply. Any way that leads us back to that kind of culture where people undertand the importance of a limited money supply and fight to preserve it is a way out of our predicament.
I'm not an economist, but I do think my intuition about money is correct.
>How so?
Money is supposed to be medium for the exchange of goods and services. At first, gold acted as a perfectly acceptable medium. However, as the economy grows, the supply of gold does not at the same rate, hence why money slowly became less and less tied to gold. First came fractional reserve banking and then the end of the gold standard. As long as the dollar is tied to gold, you always need to factor in the opportunity cost of holding gold into making an investment or a loan. For the decades following WWII, the American government could ignore this effect because the Bretton Woods system basically allowed the American government to pass that opportunity cost onto the Europeans and Japanese who were desperate for economic stability, but that wasn't sustainable forever. The wealth the American government got from essentially renting out dollars trickled down to the people, which is why I think many people reminisce the gold standard.
>Its called the Cantillion Effect... Private equity and venture capitalists are often very close to banks too
So can you define what you mean by being "close to the Fed"? I think the Cantillon effect just describes how the rich asymmetrically benefit from monetary expansion. The rich and poor can both take advantage of cheaper debt, but only the rich can afford to use that to grow their wealth.
I don't think that this is enough reason to stop monetary intervention though. I'd much prefer our status quo to another Great Depression. The problem isn't that the Fed expands the money supply when the velocity of money falls. The problem is that they are unable to shrink the money supply when the economy recovers because with the rest of the federal government is required to issue $1 trillion in debt every year to operate. In theory, returning to a gold standard would incentivize Congress to be better at fiscal policy, but I'm pretty sure that they would just instantly become bankrupt.
> as the economy grows, the supply of gold does not at the same rate
Correct. As the economy produces more at lower cost, you would expect that prices would fall, right? That's exactly what would happen in an inflation free currency. What is inefficient about that?
> First came fractional reserve banking and then the end of the gold standard
This is not a new pattern. It has happened over and over again throughout history. See https://www.principles.com/the-changing-world-order/ . The reason is that it is too enticing for governments to pretend they have more money than they do. Creating promisory notes are easy to inflate, which gives the elites seigniorage rents. Its corruption that leads to things like fractional reserve, not some failing of backed currencies.
> you always need to factor in the opportunity cost of holding gold into making an investment or a loan
Yes.. So what? If you're implying that this limits how many investments are loans are made, then yes, it does limit those things. And that's good. Why? Because not all investments or loans are worth while. Giving resources to low-return businesses is inefficient. If you have lots of businesses with 5% ROIs around, its actively harmful to invest in an investment that yields 1% because of the 4% opportunity cost you're inurring.
> So can you define what you mean by being "close to the Fed"?
Basically anyone that does advantageous transactions with the Fed is "close to the Fed", this is primarily member banks, but there are also other financial institutions that get secondary advantageous transactions. For example, when the government borrows money, it sells bonds to banks, who then often turn around and sell it to the Fed at a higher price. Banks also get below-market loans (the discount rate). These are all mechanisms of seigniorage originating with the central bank's ability to create money.
> Cantillon effect just describes how the rich asymmetrically benefit from monetary expansion
That sounds right to me.
> I don't think that this is enough reason to stop monetary intervention though
Well Seigniorage is a huge cost on the economy. It saps wealth from those who need it most. But Seigniorage isn't the only negative effect of monetary intervention. The intervention itself distorts the market in harmful ways that paper over real problems that need to be fixed. When investments go bad and sentiments change, injecting money into the economy can make everything look like its all well and good again, but the fact of the matter is that its not. Monetary intervention is specifically built to smooth out superficial indicators of a bad economy to make people think they should continue acting as they have before. But when there are systemic problems in what people are doing, often the only way out is to have inefficient market actors go bankrupt. If people can remain profitable even when they aren't actually creating value for the world, that's a problem. The manipulation also assumes that a group of central bankers can perform actions that go faster than other market signals. However, this is clearly not the case. Any action the central bank does will propagate at the normal market speeds. There is no mechanism for central bankers to beat that. So when they try, they are always acting too late and exacerbating the problem rather than fixing it. Its sheer hubris that anyone believes they can predict the market, much less manipulate it in advance of that prediction.
> I'd much prefer our status quo to another Great Depression
Sure, but that's a false choice. The Great Depression isn't the only alternative to the status quo.
> The problem is that they are unable to shrink the money supply when the economy recovers
I'm not quite sure that would solve the whole problem. The problem is not just the devaluation of th...
This is a great comment because while it's completely wrong empirically, it also completely misses the point of the good question about free silver.
Like the question of what was the US civil war about (slavery) the question of what silver v gold was about has been completely obscured by interested parties seeking to complicate the issue in such a way that nobody understands it any more.
There are complications, which I don't really understand, but all you need to know is that silver vs gold was about inflation vs deflation. The free silver people were farmers (who are always debtors) and they supported inflation, because inflation is good for debtors. The supporters of gold were creditors, and the supported deflation, because creditors like deflation.
It's that simple. The author of the above comment apparently thinks the populist farmers were completely wrong and they should have been against inflation. This may be true (it's not, but let's stipulate) but the commenter prefers to obfuscate the issue rather than confront the clear fact that free silver populists supported it BECAUSE it was inflationary.
You have causality backwards. Accumulating debt tends to drive inflation.
Inflation is disliked by banks, as it reduces the value of any currency-denominated assets (loans, debt, insurance premiums, etc.).
Inflation aids creditors.
The question of how money is injected into the financial system is independent of whether or not inflation occurs. Direct injection to consumers ("helicopter drops") would be least injurious to inequality. The fact that the financial sector engineers monetary supply increases to be in their favour is a problem of the wealth-power connection.
Well, its kind of a chicken and egg situation. I agree that moneatry (and price) inflation incentivizes more debt. However, the fact is that the mechanism by which monetary inflation happens is generally by creating debt. So if you were to pin whether the egg or the chicken came first, the answer would be that they happened at the same time.
> Inflation is disliked by banks
Mmm, no. Banks gain seigniorage from monetary inflation. So no they don't dislike it.
> Inflation aids creditors.
Devaluation of the currency aids creditors. However, monetary inflation does more than just currency devaluation. It also reallocates weath (seigniorage) and manipulates the market. Banks can simply loan out whatever money they want, so an inflating currency doesn't matter to them. They take that inflation into account already. What does matter is unexpected inflation. That's why uproar happens when inflation rates change significantly (either high inflation or deflation).
> Direct injection to consumers ("helicopter drops") would be least injurious to inequality
I agree. Still economically harmful, but less harmful than traditional seigniorage.
If inflation increases effective demand by consumers (that is, increases effective income and wealth of the poorest sector of society), then debt relative to total economic activity should decrease.
The problem with debt is that it is a manifestation of an underlying contradiction. One or more of:
- The expectation that those not paid sufficiently to survive can. E.g., increasing wealth inequality.
- That past obligations take precedence over current survival.
- Past consumption patterns or expectations of future consumption exceeding actual production capacities.
At some point, something has to give. Debt can be inflated away, debt can be discharged (bankruptcy, jubilee, expiry, default). Or the social order under which the debts are recognised can itself be dissolved (revolution).
Your #2 is false. Seigniorage is gain on minting money, not inflation. I have no idea what term you're confusing it with.
> If inflation increases effective demand by consumers (that is, increases effective income and wealth of the poorest sector of society)
Monetary inflation does not do that. In fact it does the opposite: it reduces effective income and wealth of the poorest sectors of society (and the middle class as well). A sudden unexpected increase in the rate of inflation does temporarily increase quantity demanded because more money is around, and this can create a little additional additional economic activity. But this is a very temporary effect, and when the rate of inflation comes back down, the reverse happens.
I think I mostly agree with your take on debt. Something has to give.
> Seigniorage is gain on minting money, not inflation.
Minting money (ie monetary inflation) leads to price inflation. So they go hand in hand. You can't have one without the other. The seigniorage gained by banks is worth a lot more than the devaluation of their bonds.
Monetary inflation where distributed to the poorest:
- Increases income and wealth relative to debt.
- Decreases the real value of debt, and the costs of payments (both interest and principle) on it.
- Increases net spending power relative to the rest of the economy. (I'm presuming a net wealth transfer effect here.)
Even in the absence of a net wealth transfer, that is, where money is injected generally to the economy rather than specifically to the poorest, the net reduction in cost of debt is a benefit.
You are still useing the word seigniorage incorrectly.
> Increases net spending power relative to the rest of the economy.
This isn't correct. What do you mean by "spending power"? Monetary inflation doesn't change the amount of physical resources in the world, therefore spending power cannot increase. Unless you mean for the segment of people that receive the money. Then sure, but what's your point?
This is all moot tho because monetary inflation is not distributed to the poorest people.
> the net reduction in cost of debt is a benefit
It is not, because lenders take inflation into account and raise rates to match. Only unexpected inflation is a benefit to lenders.
> You are still useing the word seigniorage incorrectly.
Net spending power == spending on real goods + spending on debt.
If the relative proportion paid to debt service decreases, the relative proportion paid to real goods and services increases.
Debt-dominated economies have regressive wealth allocations.
Debt instruments are not generally inflation-indexed. If there's a belief that there will be inflation, the interest rate may be increased, however that's not always the case. Regardless, creditors even if they have already priced in inflation will lobby for low-inflation policies as this increases the return on their assets (that is, debt).
How monetary policy allocates funds is in fact a policy question, and is determined by policy. There is no Divine Law of Economics which dictates one allocation over another.
You've been asserting without citation as well, just for the record. The my claim is trivially verified:
seignorage. 1. Something claimed or taken by virtue of sovereign prerogative; specifically, a charge or toll deducted from bullion brought to a mint to be coined; the difference between the cost of a mass of bullion and the value as money of the pieces coined from it. (1913 Webster)
Seigniorage is the difference between the face value of money, such as a $10 bill or a quarter coin, and the cost to produce it. In other words, the economic cost of producing a currency within a given economy or country is lower than the actual exchange value, which generally accrues to governments who mint the money.
> Net spending power == spending on real goods + spending on debt.
I still don't know what this means. What is "spending on debt"? Interest payments? Why are you calling amount spent "spending power"? Spending power evokes the idea of potential, not actual spending. Your terminology is confusing.
> the interest rate may be increased, however that's not always the case.
When the price inflation rate is relatively stable, it will automatically be accounted for via the normal price system (ie not by conscious up pricing).
> Regardless, creditors even if they have already priced in inflation will lobby for low-inflation policies as this increases the return on their assets (that is, debt).
Ok. Well this isn't true when the creditors are primarily banks reciving seigniorge benefits.
> The my claim is trivially verified
Your claim that I'm using seigniorage wrong? The definitions you're quoting about seigniorage agree with the way I'm using the word. I don't know why you think I'm using it wrong.
Why is this a useful definition of net spending? What about business spending? What about government spending? Do you include business debt payments in "debt payments"? I also don't know why you think increasing consumption as a total share of spending would increase the wealth of creditors.
I get that you're trying to show how inflation leads to debt reduction. It is true that unexpected and sudden increases in inflation lead to debt reduction, but its only one very small piece of the puzzle. Unexpected and sudden inflation is quite rare in our current economic environment.
The key issue for “Free Silver” is not paper certificates,
nor unlimited coinage, but the fixed exchange rate between silver and gold, in which the two metals were considered
primarily as money, and not as commodities with separately
varying supply and demand patterns.
Imagine briefly a market in which APPL and TSLA
common stock were subject to a fixed price ratio.
Crazy idea, yes? But a 16:1 ratio for silver:gold
makes just as much sense from a market point of view.
For the consumer, investor, banker, a fixed ratio is a nice
convenience, but if the supply or demand for either gold
or silver were to change significantly, opportunities for
arbitrage could become very profitable. Now think of
the California gold rush, the Comstock silver lode, and
the hundreds of other mining booms between 1850 and 1896.
Who benefited, and who paid? Were WJ Bryan and other orators and politicians champions of the masses or tools of the robber barons?
Ultimately, WJ Bryan was both a tool of capital and a champion of the masses, but the free silver effort was an the exceptional issue for the reasons you explained.
I think farmers loans are worth mentioning specifically. The fixed ratio was terrible for farmers who had to seasonally borrow money and pay it back with interest.
Could you expand on that a bit? Why did the fixed ratio hurt farmers (or anyone who had to borrow)? Or, how would a float between silver and gold have helped them?
It's not like a bank is going to lend you gold dollars and accept being paid back in silver dollars (or vice versa) if the ratio between them isn't fixed...
[Edit: Never mind, ffggvv answered this question below.]
Oh, there's the gap in my history class. We never learned about the economics and the fixed exchange ratio. I always looked back and presumed they were independently trading commodities the way they are today.
To answer your question, Bryan was a champion of the masses in the same way the prior occupant of the Oval Office was a champion of the masses.
One thing I read about. Before the great depression mortgages were much different than they are after the New Deal Reforms.
Loans were usually interest only. You had to either pay or refinance the principle at the end of the term. Which might be five or ten years.
If you defaulted the lender would take the collateral, all of it.
Critically loans were denominated in both dollars and gold. And could be called in often at any time to be repaid in dollars or gold, which ever was highest.
You can easily see how these could be abused by banks.
If you were a small time farmer during a downturn the price your crops fetch drops, the value of your farm drops. But the price of gold goes up which increases the amount you owe. The bank would then call in your loan and because you can't pay in gold take your farm. Leaving you with zilch.
The above is why FDR closed the banks when he took office. Because banks were strategically destroying the economy.
Farmers had massive loans that were gold denominated. (dollar backed by gold). The currency was deflationary, and the massive debts were breaking the back of farmers/rural areas.
Adding silver as backing of dollar essentially increases supply of the backing of the currency, creating inflation. which relieves the farmers debts. (pay back less real money)
so the farmers and WJB basically just wanted inflation to relieve their debt load. (and silver interests also obviously backed the idea)
This is mostly correct. I added some context in my answer that you might be interested in.
I think it would be more correct to say that adding silver would mostly cause increase liquidity it unlikely silver would have caused significant inflation.
In general I would argue the issue with silver was way overblown, if silver or not would not have changed the fundamental problem.
The people who opposed silver predicted over the top results and those who were pro silver overestimated the actual effect it would have.
The US monetary system had far more important issues related to unit banking, reserve pyramids and note issue.
So let me maybe explain this. This is a issue that is really not understood at all even by most economists. History of economics and banking history is not really tough much beyond some broad interdiction as far as I know. There are some good economic historians that have done great work on this.
I'm gone try not to go to far back, but it does require a little bit of background to understand of banking and bank regulation in the 19th century US.
The first thing to understand is that banks would issue private bank notes in this period. Think of these like checking accounts. So a checking account is a IOU the bank has towards you, and for the privilege of you lending them money, they pay you interest.
Now a bank note is basically the same thing, just that the interest actually goes to the bank. This is basically the economic driver behind bank notes in the first place. Every bank wants to have as wide and large a distribution as possible because that is basically money that was lent to them but they don't have to pay interest.
This is a fine enough system and worked well in many places around the world for quite a long time, earliest accounts going back to China 1200 century. So the idea is that if people want to hold a lot of cash, the bank prints more notes because there is less demand for there reserves, higher cash preference. However if people prefer to have more money in their checking account, they equally have to reduce the amount of notes otherwise they are in danger of gold reserves being drained to other banks who did reduce their circulation. Other banks usually realize that you are losing gold faster then you are getting it so they start to blacklist you and then you are basically done.
In practice this is very evident because the amount of notes in circulation would spike up in the summer when you had to pay workers and do a lot of transaction, and many fewer notes were in circulation in the winter because there was just less reason to carry cash. Remember that much of the economy was still driven by farming and the harvest.
To earn interest the bank has to use money to make loans or buy stocks or obligation. In some system like Canada at the time there was little restriction put on the bank what they should use to 'back' these notes. The banks basically just had to made sure they are liquid enough reserves to cover incoming IOU from costumers or more likely other banks who had accumulated many of your notes and wanted to settle.
(Little aside, these settlements were done periodically 1:1 with each bank you have accumulated notes off. Better developed such system eventually developed private clearing houses that would do this arbitration for banks and what banks lost or gained reserves, either simply moving them from one account to another on its own ledger or ordering one bank to send another the gold reserves)
The US has a somewhat different history, once state governments allowed competitive banks at all, they required notes to be treated differently then checking accounts. And take a guess what states wanted as a backing asset for notes. Good old state government debt obligation. This is not so much different from many historical kingdoms where the king would basically force the banks to loan money to him.
This caused a lot of problems because it would mean some banks would be highly leveraged with state debt and states in that period were not very not very reliable. So if a state defaulted the bank might just collapse at the same time. This was not the main issue with banking in the US and the problems caused were mostly limited and localized.
Now because of the Civil War spending requirements changed and they now started to allow 'national banks' (National Bank System). And if you think the reason behind this is that these new federally regulated banks were required to buy federal debt, rather then state debt. You would be correct. This was a reasonable measure to pay for the war as far as these things go. People continued to use state bank currency i...
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Somewhat before I cared about money, in 1971, Nixon decoupled the dollar from gold, and although I do recall hearing about the accompanying wage/price freeze, I don't think it's ever mattered to me whether or not I could exchange my paper for gold.
Requiring backing for dollars was a real limiter on inflation and government spending. Inflation fuels an ever increasing debt cycle that is incredibly harmful for the economy, but great for banks and financial institutions.
Which directly leads to instability when the value of the backing changes. I'm not aware of any mainstream movement amongst orthodox economists to revert to pre-Nixon policies.
Like any other metric, stability comes at a cost (and it also comes with baked-in assumptions). I wish there were more rigorous discussion of what the social cost of stability is (is it worth it to have stability if that means siphoning money from the poor?), who benefits from 'stability', what values our metrics for stability encode, and to what extent the Federal Reserve system is a victim of Goodheart's law in all of the goals it seeks, to include 'stability'.
When someone says something like "undoubtedly/obviously X" or "its commen sense that X" 99% of the time they haven't put much thought into it.
Most non-high income people do not have huge rainy-day funds. If they lose their job, even for a short period of time, they will find themselves relying on debt that is a lot more expensive than 2% inflation.
Stability has a high value, it is just hard to measure in dollars.
> When someone says something like "undoubtedly/obviously X" or "its commen sense that X" 99% of the time they haven't put much thought into it.
Or rather, it's an easy question to answer because we've seen the situation happen many times. Who suffers during economic downturns?
With modern economic knowledge, technology, and techniques, a gold-backed dollar could be quite a bit more stable than it was in the 1800s, don't you agree? But we don't have to go back to gold to fix this problem. The problem is not gold or not gold. The problem is massive monetary inflation. That can be solved without going back to gold backing. What gold-backing did was create a culture that believed in a limited money supply. When we destroyed that culture, we created the problem.
And no, our post-gold standard economic crises have not been proportionally more devastating than the Great Depression, or taken as long to rectify as the Long Depression, and I don't long for that kind of "stability"
It hasn't because its patently false. Both the gold confiscation in 1931 and cutting the cord of gold-backing in 1971 were both done as desparately rushed moves to reneg on the governments promise to uphold the value of the dollar. These weren't thoughtful reasoned well discussed actions. It had nothing to do with technology or best practices. It was a purely a politically expedient way to prevent collapse of an insolvent dollar.
> macroeconomists have spent the majority of the last century proposing and carrying out natural experiments
You don't run experiments in macroeconomics. Controls are impossible. And studies have so many confounding variables that any conclusions we come to are many orders of magnitude less certain than anything in the hard sciences.
> our post-gold standard economic crises have not been proportionally more devastating than the Great Depression
You must have misunderstood me. I never said any such thing.
I take it you haven't read any mainstream macroeconomic analysis written over the course of the past century, the theory, analytical techniques and predictions which informs modern central banking practices. I have. It is certainly not patently false to suggest that there has been plenty of discussion and implementation of newer ideas, an enormous amount of focus on the dynamic of inflation, and the result is very few economists seeing any sense in the notion that the optimum quantity of money to support the growth of the United States happens to coincide with fluctuations in world gold output.
But even aside from the actual theory and techniques, part of the knowledge base is simply concluding that if it was necessary break a system to prevent the collapse of an insolvent dollar, it is probably best not to attempt to recreate that state of economic affairs.
> You don't run experiments in macroeconomics. Controls are impossible. And studies have so many confounding variables that any conclusions we come to are many orders of magnitude less certain than anything in the hard sciences.
We agree it's not a hard science, and that natural experiments are very difficult (they are especially difficult when a proposal like "maybe we should try to ensure a particular USD aggregate stays at a certain level, and raise interest rates as high as necessary to keep it at that level" results in mass unemployment. When "maybe we should fix the interest rates instead" turns out to result in inflation remaining within predictable ranges for the next three decades, it is even harder to recommend the former policy). Similarly, if the Gold Standard fails to deliver the stability it promises, and then its vociferous minority of advocates promise hyperinflation is around the corner every year for decades without ever being right, new theories which accurately predict inflation take over.
> I never said any such thing.
I may have misunderstood you. If we agree that the Great Depression and Long Depression were examples of significant economic crises in addition to periodic smaller financial panics and forced devaluations, we agree. I see that as a pretty good indication our current financial crises are less worse, especially given our current policy framework gives us tools other than "wait it out" to ameliorate the suffering.
Ok. I agree with all of that. And none of it contracts what I said, which was that modern economic knowledge did not "drive us away from gold backed dollars". What drove us off the gold standard was rash actions by a federal government backed into a corner.
> if it was necessary break a system to prevent the collapse of an insolvent dollar, it is probably best not to attempt to recreate that state of economic affairs
Well, that conclusion conflates the solution with the problem. For example, if you're in an airplane and you recklessly burn all your fuel because you were having fun going fast and have to eject and abandon your plane to crash, the solution is not "bring more fuel next time" nor "don't use planes anymore". The answer is don't be an idiot and reckelessly burn all your fuel.
> If we agree that the Great Depression and Long Depression were examples of significant economic crises in addition to periodic smaller financial panics and forced devaluation
I think I agree with that.
I just don't agree that either of those depressions were caused because gold-backed currency isn't sound. In fact, before the Long Depression, we used gold backed currency. What caused the Long Depression was stupidly removing silver from the monetary supply very suddenly. That was an enormous shock to the economy that happened without enough warning. It was a monetary cliff, and cliffs are bad. Engineering transitions like that to be smooth and slow is the way to avoid that.
And the Great Depression was caused because banks lent out too much money and since the Federal Reserve had driven out all the private clearing houses and refused to act as lender of last resort. Bank runs contracted the money supply by 33%. Not sure how much that is in comparison to the Long Depression, but its a lot regardless.
What drove us off the gold standard was that the gold standard backed the government into a corner, yes. What drove essentially all macroeconomists to conclude that this was the correct one was new theory about why this had happened, the economic possibilities of this new theory, the new theory turning out to allowing finer control over price stability than the Gold Standard had ever done and the woeful quality of the analysis of the few economists still defending the gold standard.
> For example, if you're in an airplane and you recklessly burn all your fuel because you were having fun going fast and have to eject and abandon your plane to crash, the solution is not "bring more fuel next time" nor "don't use planes anymore".
"Bring more fuel" sounds like a much better solution to fuel-shortage induced aircraft accidents than slowing down to me, and I'm confident that aircraft investigators agree with me.
Assuming that the real problem with running out of fuel isn't the quantity of fuel but that jets aren't limited to early 1900s speeds and engine technologies sounds like a pretty apt analogy for calls to return to a Gold Standard, actually...
> What caused the Long Depression was stupidly removing silver from the monetary supply very suddenly. That was an enormous shock to the economy that happened without enough warning. It was a monetary cliff, and cliffs are bad. Engineering transitions like that to be smooth and slow is the way to avoid that.
I think we can agree on that (though the reason it was removed is because the bimetallic standards with dollars redeemed in fixed quantities for commodities whose actual value ratio fluctuated were absurd). For related reasons, we decided monetary cliffs generated by metallic standards were worse than having an elastic monetary supply. The Great Depression was caused because the Fed could not print enough money to act as the lender of last resort. Again, a situation we seek to avoid by having the actual quantity of money determined by the amount of credit supplied and demanded by the market, rather than simply hoping gold reserves would automagically align with it.
Not true. I'll quote from https://www.federalreservehistory.org/essays/great-depressio...
"One reason that Congress created the Federal Reserve, of course, was to act as a lender of last resort. Why did the Federal Reserve fail in this fundamental task? The Federal Reserve’s leaders disagreed about the best response to banking crises. Some governors subscribed to a doctrine similar to Bagehot’s dictum, which says that during financial panics, central banks should loan funds to solvent financial institutions beset by runs. Other governors subscribed to a doctrine known as real bills."
I've never seen any source other than you say that the great depression was caused because the Fed couldn't create money.
Why do you suppose that is? See, the system protects itself.
If you're trying to make a case that the middle class has less savings because of reasons other than that, it seems prudent to at least explain that away.
1: https://listwithclever.com/research/home-price-v-income-hist...
You're forgetting something extremely important here. It's the savings that are fueling cheap loans. Those savings force the Fed to lower interest rates. It's not the Fed that is making this decision, it's the market collectively deciding that depositing money and lending it out is the best use of their money and those savings have to go somewhere.
Before 2008 those savings were flooding into mortgage bonds and banks ran out of mortgages to sell so they just took subprime mortgages and got the rating agencies to lie for them. All for that sweet sweet commission.
What? I don't think that's at all true.
> the market collectively deciding that depositing money and lending it out is the best use of their money
I don't think anyone thinks that earning bank interest is the best use of their money. Interest is basically 0. In some countries you have to pay to hold deposits in banks.
> those savings have to go somewhere
They actually don't. We could legislate 100% reserve requirements for example, instead of the 0% we have today.
> Before 2008 those savings were flooding into mortgage bonds
I think you're misunderstand how banks operate these days. Banks no longer lend out proportional to the deposits they get, banks lend out as much as they can without any limit. The amount people are saving is literally irrelevant at this point. It was already basically irrelevant in 2000. https://www.newyorkfed.org/research/epr/02v08n1/0205benn/020...
That doesn't account for the vast difference in price based on locale. Inflation is not locale based, but housing prices definitely are.
I don't doubt that monetary policy affects housing, because it makes it easier to get loans which will affect demand, and thus pricing, but it's not the whole story, and may not even be half the story depending on the area. For example, another thing that affected demand is urbanization. But, interestingly, the rate of urbanization seems to have decreased since the 1970s (and in some regions actually regressed in the 1970 in total, not in rate of change).[1]
I think this needs to be accounted for in any coherent theory that tries to link monetary policy to lack of savings now compared to the past, when we already know that housing prices have risen much faster but that housing prices are also extremely locale based, which monetary policy isn't.
Ultimately, while I think monetary is powerful in how it affects myriad things, I think we would be remiss to use it as an explanation for everything just because it's easy to point to. Most things are far more complex than that and have many inputs that affect them, and without careful examination we can't be sure if monetary policy was the majority of the reason, or even the primary reason.
1: https://en.wikipedia.org/wiki/Urbanization_in_the_United_Sta...
There's no other way I could take out a loan for > $100k to buy an asset. Since leveraging dollar debts to assets is the only sane thing to do in an inflationary regime, it's no surprise that housing has become ridiculously overpriced.
Buying a house is the only way an average person can utilize financial techniques of the wealthy. Namely leveraging dollar debts against an inflationary hedge.
1. Closing the gold window
2. Outsourcing of manufacturing begins in earnest (combined with weakening of unions, the Clean Air and Water Acts, etc)
3. Computers really start taking over (obviously accelerates in the 80s)
4. Women started having real careers on a large scale
Inflation benefits those that can leverage dollar denominated debts against inflationary hedges. Wealthy people with assets undoubtably can do this at a grand scale while the closest thing an average person can do is buy a house.
2. Outsourcing of manufacturing begins in earnest (combined with weakening of unions, the Clean Air and Water Acts, etc)
Yes, and maybe slower globalization would have been better, but I personally am a free market all the way guy.
3. Computers really start taking over (obviously accelerates in the 80s)
This is akin to making the `pie` that is the economy greater. It does does not explain why the wealthy gained most of the new growth of said `pie`.
4. Women started having real careers on a large scale
I'm a bit torn on this as an argument. Women having careers should have increased the size of the economic `pie` and everyone should have been better off, but what seems to have happened is that competition between laborers became more intense and while the `pie` grew, the average person lost a significant portion of their share.
I have yet to fully wrap my head around this one, but it seems like labor competition combined with corporate and or governmental control in a way that prevented the distribution of the increased productivity?
> This is akin to making the `pie` that is the economy greater. It does does not explain why the wealthy gained most of the new growth of said `pie`.
Sure it does. The productivity gains from any tool are a direct monetary benefit to those who implement it. The pie is only subsequently redistributed if other market effects coerce the original beneficiary into doing so.
Record-keepers, secretaries, etc, being laid off from their job obviously have no opportunity to negotiate for higher wages as a result of that productivity gain. The only people who were in a position to negotiate were the ones who could implement these new tools. And they did: tech jobs are well paid.
It's also notable how many of the wage effects really took off in the 1980s, when there were a lot more dramatic policy shifts.
The finances of some freshly minted doctor loaded with medical school debt look a lot different than an unbanked poor person who's never qualified for credit.
Dollar denominated debt doesn’t all originate with getting credit-check-qualified approval for a loan.
why the hell is this still a belief? The indebted poor have revolving credit at best (think 10%-ish APR) or short-term credit (payday loans: 15%+ APR). Inflation does not help those situations.
The wealthy are benefitting from low-interest rate loans (margin accounts, leveraged trading, options) that are enabled by the existence of inflation, and by the mechanism, which is providing a discount window to banks (so they ride on nominal gains and are insulated from real devaluation).
Consider someone who is spending 95% of their income on day to day expenses, and we have a 1% increase in prices. Now you are spending 96% of your income on day to day expenses, which is a 20% decrease in margin of safety. It's even worse if you start at 99%.
If you are spending 20% of your income on day to day expenses and have a 1% increase in prices, your margin of safety loss is < 2%.
"But wages catch up" you say. No they don't. Otherwise inflation as a policy doesn't work.
https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
"in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts."
Inflation is a stealth wage cut, a matter of policy for cheating the labor class. Don't get me wrong, it's well intentioned - it's to prop up the low unemployment metric, but Goodheart's law applies.
Finally, inflation forces the middle class to invest instead of save, to stay afloat and build up a retirement nest egg. Investments typically must go through approved channels, e.g. "the stock market" which disproportionately favors the already wealthy, e.g. CEOs, investment managers, hedge funds.
Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
If only there was some common investment vehicle, a 'shelter,' if you will, that could shelter you from inflation while simultaneously sheltering you from the elements?
They did until a series of fiscal policy (tax and spending) changes in the 1970s and 1980s (including the massive Reagan tax burden shift onto workers) put the kibosh on it. Since then, not so much, but that’s not a monetary policy issue, insofar as those two things have been artificially segmented.
> Inflation is a stealth wage cut, a matter of policy for cheating the labor class.
You are misunderstanding the Krugman quote. The value he is citing is that as there are demand shifts in the economy, inflation allows small short-term real wage cuts in segments of the economy seeing decreased demand and therefore profitability without reducing nominal wages (whumich tend to be sticky), reducing resort to job cuts as a response, providing a buffer between short-term fluctuations and unemployment.
Krugman is not saying that inflation enables long-term, general real wage cuts to be more easily implemented or that it would be good for it to do so.
> Finally, inflation forces the middle class to invest instead of save
The middle and upper class are, by definition the clases with substantial dependence on the returns from productive capital. Inflation doesn't force the moddle class to invest in capital, substantial investment in capital while still having a dependency on your labor is what defines being middle class. You can choose not to invest in capital, whether by stuffing money in a mattress or blowing it on hookers and blackjack, but if you do that you aren’t middle class.
> Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
No, the siphon that does that is the series of tax burden shifts adopted over the last several decades with the express design of rewarding/encouraging the wealthy (often euphemized as “job creators”).
You're right, that's not what he's saying. That doesn't mean it's not happening.
Fact of the matter is that we can't decouple the "shifting of the tax burden" from the detachment of the dollar. However, we will soon find out. Biden is shifting the tax burden back, and we're gonna get inflation. My prediction is that in 10 years the lower and middle classes are going to be absolutely reamed by both of these and the upper class will be unscathed or even richer (lower class due to inflation directly and middle class due to bracket creep + taxes intended for the wealthy). Your prediction should be that income inequality will be ameliorated. We'll see who is correct.
Forcing down inflation raises interest rates, and lower interest rates help the significantly indebted a lot. Interest is literally a siphon that takes wealth from people that are earning it and gives it to those who already had it. And the debt to wealth ratio of the bottom wealth decile of the UK is 3:1
The debt to wealth ratio of the top wealth decile is, obviously, a lot smaller. They might borrow when it's tax efficient to do so, but they don't need to. Also lower interest rates actually reduce the returns they're getting on lending their money. Sure, low interest rates don't hurt their property portfolios, and are fantastic for people becoming rich by starting companies that burn through a lot of borrowed cash (and create jobs), but in general interest is a subsidy for the rich.
> The debt to wealth ratio of the top wealth decile is, obviously, a lot smaller
That's not obvious to me. Donald Trump is probably in very poor shape debt-to-wealth-wise relative to myself. The unbanked in the US are doing literally infinitely better debt-to-wealth-wise than I am.
Anyways, you are strictly thinking of personal debt. There is institutional debt that the wealthiest have either indirect access to, or benefit disproportionately from, for example corporate debt, if you are in the C-suite, or municipal debt, if you own a firm that is frequently obtaining grants to do stuff, or literally banks, if you are a major shareholder in banks, financial instruments that require low-interest debt, if you participate in a hedge fund, etc.
Low interest rate loans exist because of low inflation. If there was high inflation and full employment those rates would go up very quickly.
>Consider someone who is spending 95% of their income on day to day expenses, and we have a 1% increase in prices. Now you are spending 96% of your income on day to day expenses, which is a 20% decrease in margin of safety. It's even worse if you start at 99%.
Your employer also has now room to pay you 1% higher wages.
>"But wages catch up" you say. No they don't. Otherwise inflation as a policy doesn't work.
They do with full employment. Inflation only exists to erode the value of income earned in the past to encourage investment. To make sure those investments pay off, inflation also raises future incomes.
>Inflation is a stealth wage cut, a matter of policy for cheating the labor class. Don't get me wrong, it's well intentioned - it's to prop up the low unemployment metric, but Goodheart's law applies.
It's a hack to get to full employment. Once you have full employment workers can negotiate for increases that catch up with productivity, which today would go well above the current inflation rate.
>Finally, inflation forces the middle class to invest instead of save, to stay afloat and build up a retirement nest egg. Investments typically must go through approved channels, e.g. "the stock market" which disproportionately favors the already wealthy, e.g. CEOs, investment managers, hedge funds.
If the USD in your bank account don't represent wealth in the physical world they are effectively worthless. You're also forgetting that those investments will create jobs and some of those jobs are middle class jobs.
>Thus it is a siphon that steals wealth from the poor and middle class and gives it to the wealthy.
Ok, tell me your magic solution to achieve full employment and letting wages catch up with productivity.
Not only that, but that money is very often used to fuel government debt, which only leads to paying more money later down the line. Debt rises faster than inflation dilutes the money supply, so its simply not true that we can simply print enough money to devalue our debt. The more money we print, the more in debt we'll collectively be.
In contrast the poor typically have small loans, rents and rely on wage inflation, which usually trails price inflation by some way.
Part of the reason why the Federal Reserve was formed was because in 1907 J.P. Morgan got his boys' club together and coordinated a financial rescue, but tough luck if you weren't benefitting from that.
Letting things fail is a possibilty. The boys' club can get together and coordinate a rescue, but in one out of every n attempts of coordinated rescue, they'll fail. Which will be good for leveling income inequality.
You're not correct. Instability leads to changes in the buying power of currency, not the other way around. Unless you're talking about monetary inflation. What mechanism do you think there is to change the value of gold in a gold-backed world? The mechanism is that when there are better places to put your money than keeping it in dollars (gold backed or otherwise) the value of those dollars goes down. And vice versa, when there are fewer better places to put your money, more wealth will be held as currency and push its price up (this is why deflation is seen as bad - beacause it generally coincides with an economy that has been invisibly failing for years).
Monetary policy had been inflationary and insolvent, and rampant expansion of the money supply lead to high price inflation which of course ended in a crash. It was monetary expansion that lead to the problems in the 70s not mysterious changes to the value of gold.
That's OK, mainstream orthodox economists have completely failed to yield anything resembling pre-Nixon prosperity ever since.
The median household debt is $90,460 in the US, and the median savings is significantly lower than that. So barring hyperinflation, some reasonable inflation is actually beneficial for 'the people.' It's diluting their debt. Meanwhile, the most common investment for working people is in their home, and real estate is one of the best inflation shelters.
The parties most harmed by inflation are the ones sitting on huge amounts of cash without using it productively (so, not 'the people'), and those are exactly the parties who need a fire lit under them to prevent a deflation spiral.
In fact the more of my "value" is locked up in my home the less I am able to access it. Besides even if I were to liquidate what should I do then, go live under a bridge, the problem is even if my home has increased in value so has everyone else's home so even if I liquidate I'll still be stuck having to roll all that value over into a new home anyway because no matter what happens I still need a place to live.
It's extremely easy to access the value of your home, home equity lines of credit are used all the time.
People buy cars with HELOCs all the time.
This is actually an example of deflation hurting the poor. It's not deflation of the USD. It's deflation of land as people start hoarding land and reduce the available supply. If we could "print" more land this wouldn't be a problem.
It's like those game item NFTs. ETH goes up by 4x. Items get more expensive by 4x. It's just stupid.
There is more to monetary inflation than simply money devaluation: https://news.ycombinator.com/item?id=27476789
> In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago.
Having the same purchasing power means that wages have indeed kept up with inflation. If they didn't, it wouldn't be the same purchasing power, it would be diminished purchasing power.
[1] https://ourworldindata.org/extreme-poverty
https://en.wikipedia.org/wiki/Gini_coefficient
What's also missing from this analysis is that CPI doesn't adequately incorporate important things like that the quality-adjusted price of housing has massively increased at much faster than the general rate of inflation.
Isn't that a simplistic point of view that assumed the U.S. is either a closed system or the rest of the world as progressed at the same rate we have?
There's more global competition now, both for customers and for jobs. That wages have stayed inline with inflation in spite of the fact that America has shifted quite a bit to a services economy and those services have competition from other countries (the classic example is India), may actually point to the monetary policy preventing what would be a much worse problem, and for nothing to do with inflation.
It's easy to pick one metric and paint a picture that supports a story. It's much harder to account for many important factors, which is also why it's not done as frequently.
Anyone's theory that one specific thing is the result of many major worldwide changes is going to have an uphill battle with me. The time frame we're talking about includes the popularization of the internet, increased globalization, the recent aftermath of the civil rights movement, an over 100% increase of global population compared to a ~60% increase in United States population, and mode than halving the number of people in the world that live in extreme poverty.
Every single one of those would have massive effects on the economy, production and wages of the United States. I'm not sure how anyone could credibly make claims about how monetary policy in the U.S. was the reason for effect over the last 50 years without accounting for these and other things. It's easy to point at two things that seem to correlate over time. It's much harder to prove causation.
That absolutely might have an effect on wages in the US. However, its unlikely that real GDP would be unaffected while real wages stagnate in such a case.
> I'm not sure how anyone could credibly make claims
Lots of things happen in the world all the time in every decade. The internet isn't any more novel than electricity was or the industrial revolution was. Yes there are a lot of confounding variables that make it difficult to make empiracle conclusions. But the largest market manipulators (central banks and governments) do play a substantial role in macroeconomics, and its completely fair IMO to conjecture around the effects of those things using logic and theory.
Devaluing the debt definitely helps, but I think you noted before that that wealth is largely inaccessible.
No, we have stagflation right now. Stagflation is generally the type of inflation where production cannot follow demand. This is generally caused by supply shocks and sometimes by legislation that prevents people from working. The semiconductor shortage is causing a lack of new cars and thereby an increase in used car prices is an example of stagflation because prices go up but nobody is employed in the process to produce more cars.
However, this stagflation is unlikely to last because those car CEOs sure as hell don't want their company to go bankrupt. They'll pay more for preferential access to semiconductors and make their JIT manufacturing more resilient.
Wage increases can be part of the driver for general inflation, but they definitely tend to (unequally, though) be produced by it. However, when they aren't pushing inflation, they tend to be at a overall level less than inflation (when one cobsiders the effects of inflation alone, which is hard, because its never the only real factor), and (absent pushes like minimum wage increases) may entirely not occur in some segments.
To me, that's the real thing I think it missing from a lot of the discussions going on here. There are so many things that go into these as inputs, and over this time period, so many large global changes. It's hard for me to take some of the claimed causal relationships at face value without even lip service to some of those other things (globalization, increase in population but unevenly, social upheavals, etc).
> and (absent pushes like minimum wage increases) may entirely not occur in some segments.
Yeah, I don't expect it to be simple. In fact, the assumption that it's not simple is why I'm having trouble accepting some of the direct claims presented as they have been so far (which is without much analysis of additional factors).
Today average wage is $25.60/hr
But that's only part of the story - while wages haven't gone down over the last 50 years, the economy has increased, and normal people haven't benefited from that increase unless they've been able to pump their money into things like stocks. That means those who had wealth and no debt back in 1970 are doing great (put $1k in the Down Jones in 1970, reinvest the dividends, and instead of an inflation linked $7k, you'd have a whopping $260k today)
This means that boomers (the ones with most of the wealth and control) are very rich, but Gen-X and especially millennials are massively lagging behind where previous generations were.
Except that the U.S. isn't cut off from the world economy, and over a billion people have moved out of extreme poverty. How much of the difference in what we expect buying power should be compared to what it is is on account of globalization and sharing some of that wealth with other countries? It seems a bit suspect to assume monetary policy is the only or the majority of the reason for these observations without considering things such as that.
As in my example above, gaining 1% net benefit on a $250k house can never compare to billionaires gaining 1% on their levels of asset backed debt.
Then there's fractional reserve banking which benefit banks via interest on money that otherwise didn't exist.
And as of just over a year ago, there's no fraction of the fractional reserve left. The fed lowered the reserve requirement to 0%
https://www.federalreserve.gov/newsevents/pressreleases/mone...
It kind of sounds like your argument is "gold is expensive, so how could it be good for the poor". Is that.. really the argument you're trying make here?
Nothing simple about that though since the current system benefits the most powerful.
This _is_ why bitcoiners treat it like a religion. There is no traditional political way to return to sane monetary standards. Moving to BTC removes the untrustworthy governmental control from the equation.
Bitcoin's energy usage is only necessary as a hedge against powerful actors trying to kill it. Proof of stake currencies are great, but it's likely if bitcoin hadn't paved the way, any such system would have been killed by a state actor since it hurts their main source of finance.
But yes, hopefully bitcoin can save us from this mess one day.
The argument that imposing restrictions on the quantity of new assets the rich have already have lots of and the poor don't and need to borrow them would benefit the poor is the economic equivalent of positing a flat earth
That’s a Fed rule of thumb long-run target, but its not legislated.
The ECB also has a 2% target, and its asymmetric explanation of stability may explain it: “By stable prices, we mean that prices should not go up (inflation) significantly, and an ongoing period of falling prices (deflation) should also be avoided.” [0]
Note that they define stability as avoiding signficant inflation and also avoiding significant periods of (even small) deflation.
[0] https://www.ecb.europa.eu/explainers/tell-me-more/html/stabl...
> The bias towards inflation exists because it can reduce the real interest rate below 0%
And why would we want such a thing? With real interest rates below 0, everyone could take a loan out, sit around and do nothing, and then collect money from the "lender" later.
Honestly its too hard to figure out what you mean by that to really respond. How is this related to what I said?
No? My argument is gold is a wildly impractical currency that does not align with the goals of contemporary society (new supply is randomly distributed to land owners, its extraction ruins valuable natural resources, it requires a significant amount of fossil fuels to move, etc.)
I really wonder, why when the average low-income American is in nominal debt at fixed interest rates [0] that HN thinks inflation is bad for them (it is in fact bad for upper middle class savers like the majority of HN, so maybe that's why).
[0]https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr...
> why when the average low-income American is in nominal debt at fixed interest rates [0] that HN thinks inflation is bad for them
Many reasons. Monetary inflation doesn't just lead to devaluation of the currency - it doesn't just hurt lenders and holders of dollars. Monetary inflation extract Seigniorage from the people. Prices rise before wages, leading the poor to get poorer. The money is used by banks to extract interest from people they give loans to. Read my other comments on this thread tho. I'd rather not rehash it yet again.
Source? This Chart [0] seems to show they at least move in tandem (with wages maybe having the slight first mover edge).
>The money is used by banks to extract interest from people they give loans to
Again, I think you're poorly sourced. As sourced in the last comment, in the bottom 50% of US households, credit card debt is 50% of total debt (higher for lower percentiles, but the FED doesn't break that out), and as this chart [1] shows, credit card debt is priced independent of inflation.
Where are banks using inflation to exploit the working class, exactly?
[0] https://fred.stlouisfed.org/graph/?g=EK2n [1] https://fred.stlouisfed.org/graph/?g=EK2k
* https://www.investopedia.com/terms/s/sticky-wage-theory.asp
Store prices can be adjusted as often as once a week, but wages are generally adjusted only a couple times per year. So it makes sense that wages lag prices.
> This Chart [0] seems to show they at least move in tandem
They should move in tandem at wide granularities. But there's way too much noise in the chart to really be sure of anything from it. CPI is constantly tweaked, so its hard to even give much meaning to how the line moves throughout this chart. And why just hourly earnings here? There's lots of places that look like one leads the other and vice versa, but it may just be noise. There's too many confounding variables.
> Where are banks using inflation to exploit the working class, exactly?
https://news.ycombinator.com/item?id=27476789
So our Senior Sales associate at Home Depot doesn't see any real increase because he doesn't have any assest to take advantage of it.
Meanwhile those that have access to cheap money are able to move it to others sources that are inflation resistant, stocks, companies, real estate, etc, meaning that overtime he is still getting paid $80,000 and his house may have increased in value but everything he needs to live is outpacing his ability to buy. Meanwhile those involved in finance are now substantially richer because they got more of the new money being created by having easy accless to captial.
EDIT: If I am wrong in something here somebody tell me why, because that basically seems to be what is happening with the feds inflationary money policies is that everyone that can is borrowing at low interest rates then plowing that into real estate and the stock market because those are increasing in value so much, precisely because interest rates are so low and inflation so high.
Because wages rise with inflation too. A very simplistic explanation is that inflation hurts those that save/lend cash and helps those the own assets & borrow cash. It tends to be the poor that suffer because they save in cash & it's easier to suffer as a poor person.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
For example, if I have a debt of $250k for a house worth $250k and inflation is causing a net benefit on my asset of 1%, then sure I'm gaining from the inflationary regime.
But what of the wealthy that have billions in assets and maybe even billions in debts?
The two situations belie a completely regressive tax. The billionaire gains net 1% on their billions and I as a peasant gain net 1% on $250k.
How can you argue this doesn't generate wealth for the wealthy?
Consider further that 1% is a modest number for the net benefit of asset backed debt.
It's a regressive tax in that the person with $250k gains less in absolute terms than the billionaire. But that's just capitalism. But so what? Everyone's still better off than they were yesterday.
This also ignores the spending effects and money velocity increases inflation brings. This is why the Phillips curve is a thing. People are encouraged to spend money. Higher inflation->lower unemployment. Lower unemployment, more bargaining power, more wages, the marginal person is better off.
There's a reason why low inflation is correlated with the Regan era of corporate takeover. The wealthy today don't actually own physical assets, by and large. They own financial instruments. They'd like to be able to sit on them. They don't want to have powerful labor. Stagflation is what happens when there's an exogenous shock to the labor supply by the opening of the world combined with the oil crisis. Now you don't need more people to produce more stuff.
Why doesn't the Fed want 0% inflation?
https://www.adamsmith.org/blog/the-cantillion-effect
Between fractional reserve banking with no reserve requirements,
https://www.federalreserve.gov/newsevents/pressreleases/mone...
and unfettered government spending, it's practically irresponsible to not be in debt.
Either way, your average peasant can never keep up with the wealthy asset class under this system.
It seems to me that, currently, entry-level wages are rising faster than inflation. It isn't uncommon to see retail or fast food hiring signs advertising starting wages 2x as much as what I earned in those jobs 20 years ago -- over which time cumulative inflation has been 52.1%.
Do you think the reduced labor participation rate due to COVID-19 has made the entry-level labor market more responsive than the Cantillion Effect presumes?
http://www.shadowstats.com/alternate_data/inflation-charts
Let's get real. Every statistic has a tracking error. The CPI will always be wrong because that is the nature of measurements. However, it's not so crappy that it is off by more than 1%.
Inflation usually happens with full employment. One problem is that inflation can also drive full employment, therefore the interest rate has to act as a moderator to prevent the economy from overheating as people constantly switch jobs for better pay. Lowering the interest rate is only possible because there is slack in the economy and we haven't reached full employment. If there was full employment the Fed would have to raise the interest rate because the market demands a higher interest rate but that is not the case right now.
There probably was a trickle down Cantillion effect in his time since in the 1730s rich people would one way or another buy other people with their money.
These days it is trickling down to Google SWEs who the rich people can use to build machines to put the grocery checkers out of work. I don't think its trickling down to the grocery checkers.
So the Gini coefficient keeps increasing, rather than leading to broad inflation.
Eventually the bottom half of the economy should be effectively priced out of it, at which point we should see a deflationary collapse in the top half.
Yes, price inflation reduces the value of debt. However, it also means there is a pretty big disincentive to save money. When you take away an easy avenue for the poor to save money, those people have one less easy way to save for their future.
But to the question of who gets the money, this is the concept of seigniorage. The people closest to the money creation get the most value from that money. That's because when that new money is spent, prices haven't accounted for that monetary inflation yet, so they have higher buying power than they should have. When that money trickles down to the rest of us, that money has already lead to devaluation of the money that results in price inflation. In practice, banks, financial institutions close to those banks, and governments get the most benefit from this created money.
But this is also a zero sum game. Creating more money doesn't create more wealth. The more currency you create, the lower the value of the currency. So where does the value gained in seigniorage come from? Well it comes from the people farthest away from the hose: the poor.
This is why the monetary inflation leads to price inflation means prices go up before wages go up.
There's even more to it than this. Its a complex topic. But I hope you see where the iceberg might be.
If they spend it, poor people would still benefit because the spending is creating jobs in the process. Really, the only problem is land ownership (renting out buildings is fine) and that has nothing to do with inflation, rent seeking is a fundamental problem that drains productivity from the economy.
Sure, some rich people take out loans (but have to pay it back, which often they do by spending the loan on stuff that creates jobs) and some benefit very indirectly from asset prices rising. But as a general rule the poorest demographic borrows more than they own and lends absolutely nothing, and the richest demographic borrows less than it lends, and sees returns to its lending fall
But most banks aren't the originator of that money. The Fed creates money, all other banks lend it out which causes a money multiplier effect. However, the money multiplier doesn't actually affect prices directly - beause most of that money are deposits, ie they're not being used. Money only leads to price inflation when its spent. Banks gain seigniorage by having first access to money lent out or spent by The Fed. If they need extra money to cover for too little deposits, The Fed is there to give those banks below-market-rate loans. If the government needs to borrow more money and banks don't have enough to buy the bonds, The Fed will buy bonds from banks at above market rates so those banks can buy more bonds with the money they get back from that. That's where the seigniorage happens.
There are also financial institutions that banks give benefits to (cheap loans for example). Those financial institutions also benefit from seigniorage by getting those cheap loans. Ordinary people aren't getting cheaper loans tho. If anything, the monetary inflation pushes loan rates up, even as nil resere requirements and a low discount rate have pushed them down.
Well, of course. But what I was inquiring about was with regard to what would happen if such spending was not financed through deficits but was funded instead by direct money creation, while at the same time money creation by the central bank, etc., was proportionally diminished.
If all or most new money originated from entitlement spending (money printed for that purpose), how would that change the inflation dynamic?
Theoretically it would be better because you wouldn't need to pay a fee (interest) to middle men (banks). However, it would also be potentially a lot more abusable if congress could just create as much money as they want. Arguably the Fed now is abusing this ability anyway, so maybe it would be at least no worse if the government could do it directly.
> how would that change the inflation dynamic?
Well, devaluation would still happen, so the market distortion that incentivizes bad investments and removes an avenue for saving would still exist. If banks continue to lend out more money than they have, then we'd still have a debt cycle of booms and busts. However, the taxpayers would save money. The people gaining from Seigniorage wouldn't change much - whoever the government gives funding to would be gaining from seigniorage, with the same wealth sapping effects from the rest of the population. It might be a reasonable improvement.
AFAICT, experts have for years (even before the recent spat of foreign NIRP uses provided additional experience on the effects and raised new questions about whether the Fed would use them) long indicated that the Fed can set and pursue a negative target rate, but has never really shown interest in doing.
So we basically always need to print money.
"Fractional Reserve" banking is not a thing, as banks do not lend out reserves (except overnight to other banks). It does not and has never accurately described how banks lend, nor does it accurately define limits to bank lending. The limit to bank lending is capital. Bank capital consists of trusted assets (e.g. IOUs that central banks are willing to discount or which other banks accept as collateral for overnight loans) that are believed to be risk free. Generally this means government debt. Government debt is the sole constraint on bank lending as well as loan growth. Reserves have nothing to do with this in a modern system, and were only incidentally important in earlier systems.
> more money for interest can only come into existence by printing more.
Please define what you mean by "money". When most people think of money, they think of demand accounts, and these are not created by the government but by the private sector. Clarity in definitions can explain almost all of these misconceptions. A good rule of thumb is that someone who doesn't know what they are talking about mentions only "money". If you know what you are talking about, you specify the asset and matching liability, and so you distinguish between bank reserves, vault cash, deposit accounts, bank bonds, and different bank assets, knowing which meet capital adequacy requirements and which do not.
A good description of how the monetary system works is provided by the Bank of England report "Money Creation in a Modern Economy".
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
That article does a good job at dispelling myths of "fractional reserve banking", "money printing", and the like, and it accurately describes how modern banks work and what central banks actually do. It is required reading for anyone who goes off about "money printing" or whoever thinks that banks lend out reserves.
Are you saying that government debt is the primary asset that banks balance loan liabilities against? I don't quite follow this. Can't a bank simply loan someone money by creating deposits for that person, and balance that against the asset that is the loan instrument? Why does government debt have anything to do with it?
>> My intuition is the opposite of what you're saying. Inflation devalues debt and savings while increasing the nominal value of wages.
Both statements are true.
Inflation increases the nominal value of wages while simultaneously decreasing the real value of wages, because wages have to chase inflation instead of the other way around. Sustained latency causes this difference to increase against time.
Not deciding to arbitrarily tying the dollar to a random commodity makes the dollar more efficient. I can see how the wealthy disproportionately capture this benefit. However, it doesn't follow that people close to the Fed benefit more than anyone else does. Private equity and venture capitalists are further from the fed than banks, but have grown even faster.
Also, if you wanted to stop inflation, why not just do it another way like forcing a debt ceiling or limiting how much money can be created to a rate similar to that which gold is mined? Tying your money to a volatile commodity seems like the worst way to do it.
How so?
> it doesn't follow that people close to the Fed benefit more than anyone else does
Its a well established fact that this is the case. Its called Seigniorage. Its called the Cantillion Effect. This isn't controversial in any way.
> Private equity and venture capitalists are further from the fed than banks, but have grown even faster.
Do you have a source for that? Banks are regulated in a way that limits the risks they can take, and therefore the return they can get, so it wouldn't be surprising that banks growth is smaller, especially over short time spans (eg years vs decades). Private equity and venture capitalists are often very close to banks too, so the difference is likely negligible. And I would have to imagine that people who own private equity firms are a lot more likely to also have equity in banks.
> why not just do it another way like forcing a debt ceiling or limiting how much money can be created to a rate similar to that which gold is mined
Yes, why not? I don't think I ever advocated that going back to a gold-backed dollar is the only solution. What was important about the gold standard was that it was a widely agreed upon culture of limited monetary supply. Any way that leads us back to that kind of culture where people undertand the importance of a limited money supply and fight to preserve it is a way out of our predicament.
>How so?
Money is supposed to be medium for the exchange of goods and services. At first, gold acted as a perfectly acceptable medium. However, as the economy grows, the supply of gold does not at the same rate, hence why money slowly became less and less tied to gold. First came fractional reserve banking and then the end of the gold standard. As long as the dollar is tied to gold, you always need to factor in the opportunity cost of holding gold into making an investment or a loan. For the decades following WWII, the American government could ignore this effect because the Bretton Woods system basically allowed the American government to pass that opportunity cost onto the Europeans and Japanese who were desperate for economic stability, but that wasn't sustainable forever. The wealth the American government got from essentially renting out dollars trickled down to the people, which is why I think many people reminisce the gold standard.
>Its called the Cantillion Effect... Private equity and venture capitalists are often very close to banks too
So can you define what you mean by being "close to the Fed"? I think the Cantillon effect just describes how the rich asymmetrically benefit from monetary expansion. The rich and poor can both take advantage of cheaper debt, but only the rich can afford to use that to grow their wealth.
I don't think that this is enough reason to stop monetary intervention though. I'd much prefer our status quo to another Great Depression. The problem isn't that the Fed expands the money supply when the velocity of money falls. The problem is that they are unable to shrink the money supply when the economy recovers because with the rest of the federal government is required to issue $1 trillion in debt every year to operate. In theory, returning to a gold standard would incentivize Congress to be better at fiscal policy, but I'm pretty sure that they would just instantly become bankrupt.
Correct. As the economy produces more at lower cost, you would expect that prices would fall, right? That's exactly what would happen in an inflation free currency. What is inefficient about that?
> First came fractional reserve banking and then the end of the gold standard
This is not a new pattern. It has happened over and over again throughout history. See https://www.principles.com/the-changing-world-order/ . The reason is that it is too enticing for governments to pretend they have more money than they do. Creating promisory notes are easy to inflate, which gives the elites seigniorage rents. Its corruption that leads to things like fractional reserve, not some failing of backed currencies.
> you always need to factor in the opportunity cost of holding gold into making an investment or a loan
Yes.. So what? If you're implying that this limits how many investments are loans are made, then yes, it does limit those things. And that's good. Why? Because not all investments or loans are worth while. Giving resources to low-return businesses is inefficient. If you have lots of businesses with 5% ROIs around, its actively harmful to invest in an investment that yields 1% because of the 4% opportunity cost you're inurring.
> So can you define what you mean by being "close to the Fed"?
Basically anyone that does advantageous transactions with the Fed is "close to the Fed", this is primarily member banks, but there are also other financial institutions that get secondary advantageous transactions. For example, when the government borrows money, it sells bonds to banks, who then often turn around and sell it to the Fed at a higher price. Banks also get below-market loans (the discount rate). These are all mechanisms of seigniorage originating with the central bank's ability to create money.
> Cantillon effect just describes how the rich asymmetrically benefit from monetary expansion
That sounds right to me.
> I don't think that this is enough reason to stop monetary intervention though
Well Seigniorage is a huge cost on the economy. It saps wealth from those who need it most. But Seigniorage isn't the only negative effect of monetary intervention. The intervention itself distorts the market in harmful ways that paper over real problems that need to be fixed. When investments go bad and sentiments change, injecting money into the economy can make everything look like its all well and good again, but the fact of the matter is that its not. Monetary intervention is specifically built to smooth out superficial indicators of a bad economy to make people think they should continue acting as they have before. But when there are systemic problems in what people are doing, often the only way out is to have inefficient market actors go bankrupt. If people can remain profitable even when they aren't actually creating value for the world, that's a problem. The manipulation also assumes that a group of central bankers can perform actions that go faster than other market signals. However, this is clearly not the case. Any action the central bank does will propagate at the normal market speeds. There is no mechanism for central bankers to beat that. So when they try, they are always acting too late and exacerbating the problem rather than fixing it. Its sheer hubris that anyone believes they can predict the market, much less manipulate it in advance of that prediction.
> I'd much prefer our status quo to another Great Depression
Sure, but that's a false choice. The Great Depression isn't the only alternative to the status quo.
> The problem is that they are unable to shrink the money supply when the economy recovers
I'm not quite sure that would solve the whole problem. The problem is not just the devaluation of th...
Like the question of what was the US civil war about (slavery) the question of what silver v gold was about has been completely obscured by interested parties seeking to complicate the issue in such a way that nobody understands it any more.
There are complications, which I don't really understand, but all you need to know is that silver vs gold was about inflation vs deflation. The free silver people were farmers (who are always debtors) and they supported inflation, because inflation is good for debtors. The supporters of gold were creditors, and the supported deflation, because creditors like deflation.
It's that simple. The author of the above comment apparently thinks the populist farmers were completely wrong and they should have been against inflation. This may be true (it's not, but let's stipulate) but the commenter prefers to obfuscate the issue rather than confront the clear fact that free silver populists supported it BECAUSE it was inflationary.
Oh the irony... talking about missing the point. I didn't miss the point. I just had nothing to say about that point.
Inflation is disliked by banks, as it reduces the value of any currency-denominated assets (loans, debt, insurance premiums, etc.).
Inflation aids creditors.
The question of how money is injected into the financial system is independent of whether or not inflation occurs. Direct injection to consumers ("helicopter drops") would be least injurious to inequality. The fact that the financial sector engineers monetary supply increases to be in their favour is a problem of the wealth-power connection.
Well, its kind of a chicken and egg situation. I agree that moneatry (and price) inflation incentivizes more debt. However, the fact is that the mechanism by which monetary inflation happens is generally by creating debt. So if you were to pin whether the egg or the chicken came first, the answer would be that they happened at the same time.
> Inflation is disliked by banks
Mmm, no. Banks gain seigniorage from monetary inflation. So no they don't dislike it.
> Inflation aids creditors.
Devaluation of the currency aids creditors. However, monetary inflation does more than just currency devaluation. It also reallocates weath (seigniorage) and manipulates the market. Banks can simply loan out whatever money they want, so an inflating currency doesn't matter to them. They take that inflation into account already. What does matter is unexpected inflation. That's why uproar happens when inflation rates change significantly (either high inflation or deflation).
> Direct injection to consumers ("helicopter drops") would be least injurious to inequality
I agree. Still economically harmful, but less harmful than traditional seigniorage.
The problem with debt is that it is a manifestation of an underlying contradiction. One or more of:
- The expectation that those not paid sufficiently to survive can. E.g., increasing wealth inequality.
- That past obligations take precedence over current survival.
- Past consumption patterns or expectations of future consumption exceeding actual production capacities.
At some point, something has to give. Debt can be inflated away, debt can be discharged (bankruptcy, jubilee, expiry, default). Or the social order under which the debts are recognised can itself be dissolved (revolution).
Your #2 is false. Seigniorage is gain on minting money, not inflation. I have no idea what term you're confusing it with.
Monetary inflation does not do that. In fact it does the opposite: it reduces effective income and wealth of the poorest sectors of society (and the middle class as well). A sudden unexpected increase in the rate of inflation does temporarily increase quantity demanded because more money is around, and this can create a little additional additional economic activity. But this is a very temporary effect, and when the rate of inflation comes back down, the reverse happens.
I think I mostly agree with your take on debt. Something has to give.
> Seigniorage is gain on minting money, not inflation.
Minting money (ie monetary inflation) leads to price inflation. So they go hand in hand. You can't have one without the other. The seigniorage gained by banks is worth a lot more than the devaluation of their bonds.
- Increases income and wealth relative to debt.
- Decreases the real value of debt, and the costs of payments (both interest and principle) on it.
- Increases net spending power relative to the rest of the economy. (I'm presuming a net wealth transfer effect here.)
Even in the absence of a net wealth transfer, that is, where money is injected generally to the economy rather than specifically to the poorest, the net reduction in cost of debt is a benefit.
You are still useing the word seigniorage incorrectly.
Sure.
> Decreases the real value of debt
Yes. A consequence of the above.
> Increases net spending power relative to the rest of the economy.
This isn't correct. What do you mean by "spending power"? Monetary inflation doesn't change the amount of physical resources in the world, therefore spending power cannot increase. Unless you mean for the segment of people that receive the money. Then sure, but what's your point?
This is all moot tho because monetary inflation is not distributed to the poorest people.
> the net reduction in cost of debt is a benefit
It is not, because lenders take inflation into account and raise rates to match. Only unexpected inflation is a benefit to lenders.
> You are still useing the word seigniorage incorrectly.
Simply asserting that is not convincing.
If the relative proportion paid to debt service decreases, the relative proportion paid to real goods and services increases.
Debt-dominated economies have regressive wealth allocations.
Debt instruments are not generally inflation-indexed. If there's a belief that there will be inflation, the interest rate may be increased, however that's not always the case. Regardless, creditors even if they have already priced in inflation will lobby for low-inflation policies as this increases the return on their assets (that is, debt).
How monetary policy allocates funds is in fact a policy question, and is determined by policy. There is no Divine Law of Economics which dictates one allocation over another.
You've been asserting without citation as well, just for the record. The my claim is trivially verified:
seignorage. 1. Something claimed or taken by virtue of sovereign prerogative; specifically, a charge or toll deducted from bullion brought to a mint to be coined; the difference between the cost of a mass of bullion and the value as money of the pieces coined from it. (1913 Webster)
http://dict.org/bin/Dict?Form=Dict2&Database=gcide&Query=Sei...
Seigniorage is the difference between the face value of money, such as a $10 bill or a quarter coin, and the cost to produce it. In other words, the economic cost of producing a currency within a given economy or country is lower than the actual exchange value, which generally accrues to governments who mint the money.
https://www.investopedia.com/search/?search-terms=seigniorag...
Again: the words you're using don't mean what you're asserting they mean.
I still don't know what this means. What is "spending on debt"? Interest payments? Why are you calling amount spent "spending power"? Spending power evokes the idea of potential, not actual spending. Your terminology is confusing.
> the interest rate may be increased, however that's not always the case.
When the price inflation rate is relatively stable, it will automatically be accounted for via the normal price system (ie not by conscious up pricing).
> Regardless, creditors even if they have already priced in inflation will lobby for low-inflation policies as this increases the return on their assets (that is, debt).
Ok. Well this isn't true when the creditors are primarily banks reciving seigniorge benefits.
> The my claim is trivially verified
Your claim that I'm using seigniorage wrong? The definitions you're quoting about seigniorage agree with the way I'm using the word. I don't know why you think I'm using it wrong.
Net spending == consumption + debt payments
Reduce debt through inflation, consumption increases a share of total spending. Wealth of creditors increases.
We seem to be inhabiting different universes on the remainder of the discussion.
Why is this a useful definition of net spending? What about business spending? What about government spending? Do you include business debt payments in "debt payments"? I also don't know why you think increasing consumption as a total share of spending would increase the wealth of creditors.
I get that you're trying to show how inflation leads to debt reduction. It is true that unexpected and sudden increases in inflation lead to debt reduction, but its only one very small piece of the puzzle. Unexpected and sudden inflation is quite rare in our current economic environment.
Imagine briefly a market in which APPL and TSLA common stock were subject to a fixed price ratio. Crazy idea, yes? But a 16:1 ratio for silver:gold makes just as much sense from a market point of view.
For the consumer, investor, banker, a fixed ratio is a nice convenience, but if the supply or demand for either gold or silver were to change significantly, opportunities for arbitrage could become very profitable. Now think of the California gold rush, the Comstock silver lode, and the hundreds of other mining booms between 1850 and 1896.
Who benefited, and who paid? Were WJ Bryan and other orators and politicians champions of the masses or tools of the robber barons?
I think farmers loans are worth mentioning specifically. The fixed ratio was terrible for farmers who had to seasonally borrow money and pay it back with interest.
It's not like a bank is going to lend you gold dollars and accept being paid back in silver dollars (or vice versa) if the ratio between them isn't fixed...
[Edit: Never mind, ffggvv answered this question below.]
To answer your question, Bryan was a champion of the masses in the same way the prior occupant of the Oval Office was a champion of the masses.
Loans were usually interest only. You had to either pay or refinance the principle at the end of the term. Which might be five or ten years.
If you defaulted the lender would take the collateral, all of it.
Critically loans were denominated in both dollars and gold. And could be called in often at any time to be repaid in dollars or gold, which ever was highest.
You can easily see how these could be abused by banks.
If you were a small time farmer during a downturn the price your crops fetch drops, the value of your farm drops. But the price of gold goes up which increases the amount you owe. The bank would then call in your loan and because you can't pay in gold take your farm. Leaving you with zilch.
The above is why FDR closed the banks when he took office. Because banks were strategically destroying the economy.
Farmers had massive loans that were gold denominated. (dollar backed by gold). The currency was deflationary, and the massive debts were breaking the back of farmers/rural areas.
Adding silver as backing of dollar essentially increases supply of the backing of the currency, creating inflation. which relieves the farmers debts. (pay back less real money)
so the farmers and WJB basically just wanted inflation to relieve their debt load. (and silver interests also obviously backed the idea)
I think it would be more correct to say that adding silver would mostly cause increase liquidity it unlikely silver would have caused significant inflation.
In general I would argue the issue with silver was way overblown, if silver or not would not have changed the fundamental problem.
The people who opposed silver predicted over the top results and those who were pro silver overestimated the actual effect it would have.
The US monetary system had far more important issues related to unit banking, reserve pyramids and note issue.
I'm gone try not to go to far back, but it does require a little bit of background to understand of banking and bank regulation in the 19th century US.
The first thing to understand is that banks would issue private bank notes in this period. Think of these like checking accounts. So a checking account is a IOU the bank has towards you, and for the privilege of you lending them money, they pay you interest.
Now a bank note is basically the same thing, just that the interest actually goes to the bank. This is basically the economic driver behind bank notes in the first place. Every bank wants to have as wide and large a distribution as possible because that is basically money that was lent to them but they don't have to pay interest.
This is a fine enough system and worked well in many places around the world for quite a long time, earliest accounts going back to China 1200 century. So the idea is that if people want to hold a lot of cash, the bank prints more notes because there is less demand for there reserves, higher cash preference. However if people prefer to have more money in their checking account, they equally have to reduce the amount of notes otherwise they are in danger of gold reserves being drained to other banks who did reduce their circulation. Other banks usually realize that you are losing gold faster then you are getting it so they start to blacklist you and then you are basically done.
In practice this is very evident because the amount of notes in circulation would spike up in the summer when you had to pay workers and do a lot of transaction, and many fewer notes were in circulation in the winter because there was just less reason to carry cash. Remember that much of the economy was still driven by farming and the harvest.
To earn interest the bank has to use money to make loans or buy stocks or obligation. In some system like Canada at the time there was little restriction put on the bank what they should use to 'back' these notes. The banks basically just had to made sure they are liquid enough reserves to cover incoming IOU from costumers or more likely other banks who had accumulated many of your notes and wanted to settle.
(Little aside, these settlements were done periodically 1:1 with each bank you have accumulated notes off. Better developed such system eventually developed private clearing houses that would do this arbitration for banks and what banks lost or gained reserves, either simply moving them from one account to another on its own ledger or ordering one bank to send another the gold reserves)
The US has a somewhat different history, once state governments allowed competitive banks at all, they required notes to be treated differently then checking accounts. And take a guess what states wanted as a backing asset for notes. Good old state government debt obligation. This is not so much different from many historical kingdoms where the king would basically force the banks to loan money to him.
This caused a lot of problems because it would mean some banks would be highly leveraged with state debt and states in that period were not very not very reliable. So if a state defaulted the bank might just collapse at the same time. This was not the main issue with banking in the US and the problems caused were mostly limited and localized.
Now because of the Civil War spending requirements changed and they now started to allow 'national banks' (National Bank System). And if you think the reason behind this is that these new federally regulated banks were required to buy federal debt, rather then state debt. You would be correct. This was a reasonable measure to pay for the war as far as these things go. People continued to use state bank currency i...