Funny Money

New car, caviar, four star daydream
Think I'll buy me a football team
--Pink Floyd

Nice discussion by Frank Shostak about the invalid assertion that money supply most grow with the supply of goods and services, lest economic activity will be suffocated. This argument is presented by many economists as to why a gold standard would never work(since gold is relatively scarce and cannot be increased in supply at will like paper money). This argument also is used to justify the 'need' for central banks.

Imagine a society where all money ever to be used is created before production begins. No additional money will be added over time. Now production begins. If, over a certain period of time, productivity increases, then each unit of money buys more goods and services (i.e., prices decline). If productivity of goods and services declines, then each monetary unit buys less goods and services (prices increase).

Money itself does not inhibit economic activity. The price of money in terms of the goods and services produced that it can buy may certainly change, but this bears no direct relationship on economic capacity.

In fact, in our hypothetical society, if productivity steadily increases over time, then prices should steadily decline over time. Central bankers and politicians would like us to believe that falling prices are somehow associated with economic armageddon. In a stable money world, however, falling prices are natural outcomes of productive society.

If one's brain is engaged, it should be easy to see that the argument that money supply must somehow be expandable at will is a poor one. Free markets will always seek money that is scarce in supply and that cannot be manipulated.

That is why gold has served as money for thousands of years.

position in XLF, gold