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Comment by mhartl | Hacker News Reader

From your comment:

This represents a problem: if the total amount of currency available for use in transactions does not maintain rough parity with the total amount of goods and services available to be exchanged in those transactions, then the imbalance will lead to wild price fluctuations.

I strongly recommend reading "What Has Government Done to Our Money?" by Murray N. Rothbard (http://mises.org/money.asp). It's short---easily read in one sitting. It's also lucid---easily understood in one sitting. You are clearly smart enough to get it, and you obviously care. Reserve the right to change your mind---you just might surprise yourself.

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What is there to change my mind about?

On one side we have a certain amount of goods and services. On the other we have a certain amount of currency which we use as a stand-in. If goods and services outpace currency, you get price swings tending toward deflation. If currency outpaces goods and services, you get price swings tending toward inflation.

Gold is advocated because the supply of it is relatively stable, thus decreasing the chance of serious inflation. The problem with gold is that it creates additional vulnerability of serious deflation.

All of this is so basic that I have a hard time believing anyone could argue with it.

Gold is irrelevant. An emergent property of human psychology is that the bulk of the money supply usually comes from leverage: humans are very willing to treat promise of future payment as assets. Catastrophic changes in the money supply generally result from trust fads, not from production/destruction of the basis asset.

Perhaps there is no real disagreement. What we have here are four concepts masquerading as two. Let's start with inflation, a rise in prices, and deflation, a fall in prices, and introduce the two missing words: expansion, an increase in the money supply, and contraction, a decrease in the money supply.

Now, expansion causes inflation, and contraction causes deflation. Both have harmful effects. But inflation doesn't imply expansion, and deflation doesn't imply contraction. By themselves, inflation and deflation aren't necessarily bad.

With a fixed currency supply, there is neither expansion nor contraction, by definition. Thus, in this case inflation and deflation simply reflect changes in supply, demand, or both. In particular, a rise in the demand for money increases its price (i.e., purchasing power) relative to other goods, which causes lower prices. If you think lower prices are necessarily a problem, I have a $50,000 computer to sell you. :-)

If you think lower prices are necessarily a problem, I have a $50,000 computer to sell you. :-)

By your logic, then inflation is a great thing since it means businesses make more money from their products?

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