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Comment by jacoblyles | Hacker News Reader

You're wrong on the fiat-money/gold standard point. You're forgetting about the price level. Any given economy can be run on any given supply of money, the prices and currency denominations just need to adjust. A gold standard doesn't transform an economy into a zero-sum game.

Pure fiat money has been functioning in the West since only 1971 when Nixon suspended the dollar's conversion to gold as a prelude to a rather shitty decade in terms of economic performance. Fiat currency has been tried plenty of times over the last few centuries; it was never a stable monetary regime. Our experiment with fiat is new and bold, and as yet unproven. If it turns out to be successful, it would be the first time.

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What happens if new value is added to the economy?

Perhaps I've just discovered a cure for the common cold. The same amount of money is now chasing a bigger pot.

Suppose lots of people pay me for my cure, and I just save all the money, what happens to the restaurant down the road?

Also fiat currencies predate Nixon, the paper contracts between members of the Hanseatic League can be thought of as a form of fiat currency.

The same amount of money chasing fewer goods leads to deflation - each unit of currency can buy more goods. When this occurs due to an increase in productivity, such as in the example you describe, deflation can accompany economic growth.

Deflation was paired with economic growth in the United States under the gold standard for about 30 years at the end of the 19th century.

This was a good recent article on a related topic. Selgin is a well-known monetary economist:

http://www.amconmag.com/article/2009/feb/09/00014/

From the article: After all, technology was improving, so goods cost less to produce. Why shouldn’t prices reflect that reality?

When it's cheaper and easier to pull MORE gold out of the ground, that's not strictly speaking a fixed money supply.

When Rome (the empire) dumped a whole bunch of new found (stolen) gold on Rome (the city) that caused inflation too.

If your money supply is growing - it's growing.

Now if you have far too lose a monetary policy and you're inflating the money supply way too much and way too fast, that can be disastrous.

But if Alan Greenspan had found a way to convert led into gold, we would have gotten the real estate bubble even with a gold standard.

Except he hasn't.

Under the gold standard, there is a feedback loop allowing the market to control inflation (that is, people can invest more or less in mining technologies/companies).

To some extent, this feedback loop also exists in a central banking system; it's far from being as efficient.

Under the gold standard, there is a feedback loop allowing the market to control inflation

Why would one want to control inflation? Inflation does not have anything to do with economic health, does it? http://www.globalpolicy.org/socecon/bwi-wto/jubi2000.htm

below 40% inflation per year, 'there is no evidence that inflation is costly'. Furthermore, there is no evidence of a 'slippery slope' there is no evidence that one increase in inflation causes further increases. Thus 'the focus on inflation ... has led to macroeconomic policies which may not be the most conducive for long-term economic growth.'

Yes. The sudden discovery of an easily-mined gold supply has the same function under a gold standard economy as the central bank expanding the monetary base in a fiat economy.

In practice, gold supplies tend to be more predictable than central banks.

How are the random deposits of a heavy metal in the earth's crust more predictable then central banks?

The last major expansion of the Eurasian gold supply was in the 1500s and 1600s, due to the looting of the Americas, and I think it roughly tripled the amount of gold in circulation. There has never been an event since the advent of gold-as-currency that multiplied by ten the amount of gold in circulation within a century, but that happens to almost every fiat currency almost every century. Predicting which decade it happens in is tricky, though.

I think using a fiat currency is probably a good idea, though.

I am not so sure predicting when a fiat currency will be inflated is tricky.

The money supply and interest rates being econ 101.

And thinking of hyper inflation, where does that usually happen?

Zimbabwe, Yugoslavia, the Weimar Republic - if a bad government wants to screw you, a gold backed currency won't save you. Does anyone think someone like Mugabe wouldn't just change the rules to do what ever he wants?

Besides, even that Money as Debt movie explains that gold is easily manipulated and thus volatile, so not good as a currency.

Billions of dollars are won and lost on Wall Street everytime the Fed meets. If it were as easy as you say to predict the actions of the central bank, this would not be the case.

How many times to the daily fluctuations of wall street affect the rate of inflation or an average person's life?

I believe there's been at least one major stock market crash that has not led to a recession.

if [...] you're inflating the money supply way too much and way too fast, that can be disastrous.

Why?

The average person can't hedge their savings/income etc against hyper inflation fast enough.

Usually people just flee to the most convenient hard currency, like the US dollar, then every pay check is a race to convert it before its value drops.

But a lot of those paychecks are not inflation indexed.

Basically hyper inflation makes it impossibly hard to preserve any kind of liquid or semi-liquid wealth.

You can only hope to have all our wealth in things like real estate or perhaps gold. Although dry beans, rice and salted bacon are probably better then gold. You can't eat gold, and I'm not sure you can trade it for food in some of the worst parts of Zimbabwe.

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