MSN hosts a debate between Peter Schiff and Diane Swonk on Inflation: Fact or Fiction?. Schiff makes a number of very Austrian-sounding points:
- inflation is an expanion of money and credit, not rising prices
- inflation affected mostly financial markets in the 90s – money created here went abroad for goods, while foreigners sent the money back for stocks, then later bonds, and then in the lat few years, real estate
- this cycle is now leaking into commodities
- risking stock, bond, and real estate prices are all forms of inflation
- the Fed is trying to confuse the public about the true nature of inflation
- financial markets have been fooled about inflation
- inflation creates mal-investments and distorts economic thinking
- foreign central banks have inflated in parallel with the Fed to prevent their currencies from rising against the dollar
- A lot of China’s import demand for natural resources is an artifact of the export of US inflation
- US productivity growth is overstated by statistical manipulations
- the CPI is highly manipulated
Swonk makes a number of rather astounding counter-arguments:
- money supply growth is not relevant as a measure of inflation
- the Fed won’t figh asset-based inflation, so investors shouldn’t care about it
- the economy is “inflation-resistant” as long as profits are rising
- investors should be more interested in how the government defines inflation than in abstract theories such as inflation being a money and credit growth
- the Fed are “the experts” on inflation
- US productivity growth has been strong
- the US has the highest propensity to consume and invest of any country in the world
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Roger M:
Of course, stable assets result in stable money, and volatile assets result in volatile money. Naturally a central bank should lean towards holding more stable assets.
You (Mike) seem to be highly confused over the meaning of “value”. The value of an ounce of silver is an ounce of silver. Any other “value” it has is entirely subjective, so whether some other thing has “equivalent value” or not depends on who you ask. Prices being widely known is irrelevant. If I had an ounce of silver and was going to exchange it for something else (spend it), I’d decide whether that something was worth more to me than the price the seller wants in silver. If not, I wouldn’t buy it. You’re basically saying the seller can just say “well, it’s worth x amount of silver”, and take that amount, whether I like it or not – a banker can decide that my note for “one ounce of silver” is going to be exchanged for this thing of “equivalent value”, just because that’s the market price.
Peter:
I’m just talking about a price where market supply equals market demand–not the personal valuation of some individual. If a bank issues paper dollars, and if I understand that those dollars will be redeemable for one ounce of silver 99.9% of the time, and the other 0.1% of the time they will be redeemable into something that a bankruptcy judge deems to be of equivalent value, then I’d be willing to take a dollar instead of an ounce of silver in ordinary transactions. That’s exactly what we all do when we hand a paper dollar to a banker and receive a checking account dollar in exchange. We all recognize that the checking account dollar is just as valuable as the paper dollar. In the 1800′s people carried this a step further, and recognized that an adequately backed paper dollar was just as valuable as a silver dollar.
Mike,
This: “…to take a dollar instead of an ounce of silver in ordinary transactions. That’s exactly what we all do when we hand a paper dollar to a banker and receive a checking account dollar in exchange. We all recognize that the checking account dollar is just as valuable as the paper dollar.”– you jest, yes?
There is No correct correlation between the two actions you set up here: “to take a dollar instead of an ounce of silver in ordinary transactions. That’s exactly what we all do when we hand a paper dollar to a banker and receive a checking account dollar in exchange.”
This: “We all recognize that the checking account dollar is just as valuable as the paper dollar.”–I hope that the readership, and yourself, realize that the truth value of the above is such, because both “dollars” are intrinsically worthless. Much contra to, the earlier above, posit: “to take a dollar instead of an ounce of silver in ordinary transactions. That’s exactly what we all do when we hand a paper dollar to a banker and receive a checking account dollar in exchange.”
and the other 0.1% of the time they will be redeemable into something that a bankruptcy judge deems to be of equivalent value
But the relevant question is not what some bankrupcy judge deems equivalent, but what you deem equivalent. And it’s not up to the judge anyway; he can only give you something that the bank owns as “backing” for its dollars, which severely limits what you can get.
We all recognize that the checking account dollar is just as valuable as the paper dollar.
Actually, no, we don’t. In a sensible world, without fractional reserve banking, they would be because the paper dollar would be sitting there in the bank’s vault “backing” the chequing account dollar (and an fraction of an ounce of gold, or whatever, would be sitting in another vault “backing” the paper dollar – obviously you can burn the paper dollar in this case and the gold can directly back the chequing account dollar). In this world, that’s not the case. Thus, a chequing account dollar is worth less than a physical banknote. Bank runs are very uncommon events today, so nobody worries about the difference – unless they happen to live in some South American banana republic that has a currency meltdown. (The central bank could print paper notes to save the banks, but it would soon be put back into the banks, and you’d have the most massive hyperinflation in history…)
Peter:
“Thus, a chequing account dollar is worth less than a physical banknote.”
Anyone with a checking account trades checking account dollars for paper dollars on a 1-1 basis. In fact, I prefer checking account dollars to paper ones in most cases, since they are less likely to be lost or stolen.
On the day I deposit silver for a paper dollar, I deem that I am willing to risk the .01% chance of being at the bankruptcy judge’s mercy, since I understand that the world has risk. In fact, I’d deem a fractional reserve bank les risky than a 100% reserve bank, since the latter is more vulnerable to robbery, and earns less interest with which to cover its costs.
ME Hoffer:
No jest.
Since people do in fact exchange paper dollars and checking account dollars for real goods, and since those dollars are intrinsically worthless, the simplest explanation is that both are backed, just like any other financial security. Since all banks, including central banks, have balance sheets that show assets backing their money, the real question is why people ever came to believe that unbacked money exists.
Mike,
Just because people engage in the “hard to explain”: “exchange paper dollars and checking account dollars for real goods”, it doesn’t lead to: “the simplest explanation is that both are backed,…”.
The Federal Reserve Note is un-backed. In answer to your “real question” : “why people ever came to believe that unbacked money exists(?)”.
Nowhere throughout the chain of “claims” that you may believe are “backing” the U$D FRN will you get Anything other than “More of the same”.
Your continuous positing to the contrary is simply wrong. To reiterate, nothing “backs” the U$D FRN, it is irredeemable, its very issuer, the Federal Reserve, will tell you as much.
Anyone with a checking account trades checking account dollars for paper dollars on a 1-1 basis.
Yes, I said that in the very next sentence: “Bank runs are very uncommon events today, so nobody worries about the difference”.
I saw the Diane Swonk-Peter Schiff debate on Schiff’s website, europac.net. Diane Swonk thinks that there is “asset based” inflation and “goods based” inflation. However, basic accounting tells you that inventory is no less an “asset” than land, so Schiff is right, there is no distinction, there is only inflation. What is truly missing from this that the reason the Fed is not “willing” to fight asset based inflation, as Swonk says, is because the only beneficiary is the government, which levies a stealth tax. If I own a store and it’s value increases by $1M via inflation, and I sell it to B and buy a warehouse from C which has also increased in value by $1M via inflation, and C buys a casino from B which has increased in value by $1M, then the government can tax $3M in gain and no one has truly gained at all in real terms.
Dale,
The point you make is valid, that inflation of assets results in a stealth tax increase. Not totally true that “no one has truly gained at all in real terms”. But inflation is not totally uniform. Some things go up more than others. There are some people who make real gains as they are able to cash out of inflated assets and pass them along to someone else before consumption goods prices catch up and neutralize the gain in the assets.
About gold and silver being too bulky—I’ve heard this ridiculous comment before:
Today’s most common note is the $20 bill, no?
$20 in gold, even at today’s artificially low prices, weighs almost exactly the same as a $20 Jackson (which ways about 1 gram). And gold
being about 20 times as dense as paper, the gold would take up about 1/20 as much space. So the biggest American banknote, the Franklin, is still 4x as bulky as the same value in gold!
I suppose gold is about the same volume as a 500 Euro note. I saw a few of those in Austria…
Mika Nystrom
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