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To: neolib who wrote (91158)	10/3/2007 11:42:22 AM
From: GraceZ	Read Replies (1) \| Respond to of 306849

<Since you proposed 3) I'd ask what happens if the savings rate > productivity growth and you are on a gold standard? It is pretty easy to envision 3% savings and 2% productivity. Since the savings are all hard currency, where does the 1% shortfall come from? There you have described in a nutshell what Keynes called the "paradox of thrift". en.wikipedia.org Read the arguments against this idea put forth by Keynes because they are important, they hint that increasing supply can stimulate demand. The paradox of thrift is one of the ideas that lead directly to what we call "demand management" economics. This idea that demand always has to somehow be managed either dampened or stimulated using fiscal or monetary tools, if left to individuals it would somehow dwindle to nothing or rise to such a boom state that it would end up in bust with resulting chaos (what the Wiki article called "fallacy of composition"). The best argument against this demand management concept is Says Law: en.wikipedia.org It basically states that supply creates it's own demand. In a world where the supply of money grew at some slow rate that could not be artificially raised or lowered by some room full of smart guys, the price of money would float with other goods. As the demand for money rose the price people would be willing to pay for those savings would rise and this would result in some of that savings you are worried about doing nothing coming out of the mattress. To allow this, you'd have to trust that people, in aggregate, know more than a room full of PhDs. My complaints about the way the monetary system is handled now have a lot to do with using monetary tools to provide this demand management Keynesian stimulus to the economy. The way monetary policy is conducted is a long way from a rule based money supply system which would add money to the system at a slow regular rate regardless of the short term changes in the demand for cash. Basically this idea was tried for a very short period and abandoned quickly. The allure of being able to "do good", to provide eternal prosperity, is too great, so a we have a group of smart men we've given the power to manage the economy. We have a system where the price of money is managed and the supply is allowed to float. That and inflation targets. As for money, they've destroyed the most important signal in any marketplace, price. You have to ask with price destroyed how do they know where it should be? The old Soviet price setters used to read the commodity prices in the Wall Street Journal in order to set their prices. What is the Fed reading? The result is the exact opposite of their intent, the Fed is constantly acting to clean up their previous mistakes. Elroy at one point or another backed three of these (1, 2, and 4) but seems most attached to 1). He may have written zero, but as I pointed out, he is fully aware that even a fully commodity based money system would grow at a low rate. I think you need to let this idea go because it's really a small point and not really important if what you really want to do is understand why the monetary system as it is currently designed has problems. So in reality we have: 1) Zero- not an option 2) savings growth- open to too much interpretation of what is savings 3) productivity growth- approximates the gold standard without giving control of the price of gold to the government (which happened in every commodity money system) which allows for gold price to provide discipline. 4) GDP- way too subject to mistrust and disagreement. 5) Fed's > GDP approach- this might be the long run effect but this isn't their approach, several times in the last few years permanent injections were far lower than the rate of GDP growth. As I've stated above they allow the money supply to float while controlling the base price of money (interest rates). They do add permanent, but this is not in line with GDP growth as such but it matches the growth in the scale of transactions. What they attempt to do is hold a low stable rate of inflation without raising interest rates so high that it bites into employment or GDP growth. In principle, had they stuck to principle, what they started out doing before they went off on the tangent of Keynesian counter cyclical policy was to manage the money supply in such a way that the money supply would never become an economic factor in and of itself.