I asked Heinz for his thoughts on that idea (as his Misean perspective is always helpful to me) and this is what he had to say:
"the problem of fiat money inflation is far more complex than this simplistic 'but you must consider interest rate returns' and 'the dollar has lost X% of its value' back-and-forth suggests.
for one thing,the effects of money supply inflation do not propagate through the system evenly. whoever gets hold of the new money first has an advantage vs. everybody else, as they can spend the money before it causes price rises.
it is the average Joe who loses out in this game.
let's also not forget, most people are hardly in the position of saving so much cash money that they can actually earn those interest rates in amounts sufficient to offset the effects of inflation (interest rates would by the way only be a fracion of what they now are in a free market money system, as the need to protect oneself against inflation would not exist ).
instead, they have to spend it, and that's where they run into the pernicious effect of inflation, namely prices that usually rise before their wages do.
furthermore, and more importantly, fiat money expansion causes a constant sequence of boom-bust cycles (this can be observed in the different financial asset bubbles that are let loose concurrently. in the 70's, it was commodities, in the 80's Japanese stocks, in the 90's US stocks, and in the 00's so far, real estate - i.e. as soon as one bubble deflates, another is born).
these boom-bust cycles are a consequence of the misdirection of resources caused by fiat money inflation. imagine for a moment, an economy without money. if you're a baker making bread, and want to buy tomatoes from the tomato grower, you have to first produce bread in excess of your personal requirements to be able to exchange it for the tomatoes (this excess bread are your savings). in short, you must first produce, then you can consume.
money is merely a placeholder for this production. it allows the establishment of the division of labor and a complex structure of production, as the market usually chooses a commodity to function as money that is fungible , divisible, doesn't spoil and is scarce. the baker is still saving bread, only he does so in the form of money (note that bread spoils over time, whereas there are other goods the production of which requires long range planning and that do not spoil. money enables this long range planning).
note though, that the principle remains that savings are backed by production. the savings are backed by real goods. this is the pool of real funding.
now , a central bank with its printing press 'creates' money out of thin air. this money is NOT backed by production. it follows that when the money is spent , something (real goods and services) is exchanged for nothing (money out of thin air). this damages the pool of real funding, and leads to resource misallocation, as entrepreneurs react to the artificial demand created by the money inflation by changing their production and investment plans.
as a consequence, various activities spring up that do not in reality create wealth. the boom results, until these activities are unmasked for what they are when the inflation either slows down voluntarily (the central bank 'taps the brakes' ) or the system itself goes off the rails (Germany 1923 for example), and the bust ensues.
of course there is a small elite that profits from this state of affairs , at the expense of everybody else. politicians, as the printing press allows them to finance the vote buying that lies at the heart of the modern welfare/warfare state, and the bankers that form the central banking cartel. the economy at large however (which means, everybody else) is paying an artificial and hidden tax. gold stands in the way of this process, which is why our masters have done away with it. gold of course is the money the free market has settled on after centuries of trial and error, but it is not important WHICH commodity functions as money, as long as the market has decided on one (if it finds something more suitable than gold, than that something will begin to function as money).
what would the world be like if the State didn't put a gun to our heads and say 'you must accept this central bank produced legal tender fiat money'? this is an important question to ponder, as advocates of the status quo often bring up the fallacious canard of 'but we have seen a lot of economic growth and growing prosperity during the fiat money era'.
the answer is that the world would be very different indeed. for one thing, prices in general (insofar as one can speak of an 'aggregate level of prices') would gently decline most of the time. they would still fluctuate against each other of course, as they are the market's way of signaling which resources or goods are needed more than others, but over time, money would increase in value (the opposite of what is happening now), as advances in productivity would lead to ongoing price declines.
general prosperity would be far in excess of what it is now, as very little malinvestment and misdirection of resources would occur (there would of course still be instances of capital being invested badly, but they would correct far quicker than they do under the fiat regime and they would be far smaller in number).
politicians would have far less power than they have now, as they could not spend what they don't have. government spending couldn't be financed via the printing press anymore, it would have to be financed by taxes alone. that would put a quick end to 'pork barrel' type wasting of resources. you can bet that individual liberty would consequently be much increased. the state would be far less inclined to fight 'wars of choice' , such as the current debacle in Iraq, for reasons of financing alone.
there would be no powerful banking cartel that can do as it pleases. banks would have to sink or swim on purely commercial merits, instead of on political ones as is the case now.
it is true that general prosperity has increased, even in the fiat money era. but it has not increased because of fiat money inflation, but in spite of it.
without the constant inflation of the past 100 years, we all would be far more prosperous and free." HB |
