Ron Paul and Deflation

[TurtleBurger]

A question for the economic gurus:
Would a Ron Paul presidency move our economy into deflation? If so, what would he do for people with mortgages and other large loans that could be hurt by deflation? It could ruin a lot of people who took out loans of weak dollars to have to repay them with strong dollars.

[forsmant]

Probably give them advice.

[Gilby]

A question for the economic gurus:
Would a Ron Paul presidency move our economy into deflation? If so, what would he do for people with mortgages and other large loans that could be hurt by deflation? It could ruin a lot of people who took out loans of weak dollars to have to repay them with strong dollars.

He is for competing currencies. That means we will be able to get out of the FRNs and into some other currencies.

Congress does have the power to regulate the Federal Reserve so that deflation of their bills of credit cannot be done. In my opinion, the FRNs will eventually become worthless due to inflation, regardless of who becomes President, so with Ron Paul, at least we won't suffer through price controls and will have an alternative to FRNs.

[Tom228]

Well any sort of Standard, gold or silver, are subject to deflation since you physically have to go out and mine it. With the fiat money you can increase the money supply when you need to.

[Truth Warrior]

Inflation is bad. Deflation is bad. I'm firmly pro "flation". :)

[Chester Copperpot]

A question for the economic gurus:
Would a Ron Paul presidency move our economy into deflation? If so, what would he do for people with mortgages and other large loans that could be hurt by deflation? It could ruin a lot of people who took out loans of weak dollars to have to repay them with strong dollars.

No, it wouldnt move the economy into deflation as its not returning to an older fixed gold standard.. THAT would cause a serious problem but we've learned from that because england did that after WWI.

Ron Paul's idea of competing currencies however would put the brakes on the feds ability to print money out of thin air because people would have the ability to NOT receive federal reserve notes for payment or to save their money in.. If they kept printing too many dollars the value of peoples gold or silver money would go up appropriately.

It would force the govt to balance the budget or have very high inflation.

[golf247]

With the fiat money you can increase the money supply when you need to.

You say that like it's a good thing. If we had a true free market and no (or at least limited) fractional reserve banking, then we wouldn't care about deflation. When people are saving more money there would be less demand for goods and prices would naturally go down. This would increase the buying power of your gold. As soon as people start spending again, there is more demand so prices move back up a little.

It's a fallacy to believe that you have to increase the money supply to counter act those people who are stashing away cash. That's what's gotten us into this mess. As soon as government has the power to create fiat currency, it will be abused. A 100% gold standard and a true free market would ebb and flow a little, but we would never have to care about the total amount of money in the money supply. Rothbard pointed this out quite well.

[Truth Warrior]

Gresham's Law ........... "Bad money drives good money out of circulation".
http://en.wikipedia.org/wiki/Gresham's_Law

[Carl Corey]

A question for the economic gurus:
Would a Ron Paul presidency move our economy into deflation? If so, what would he do for people with mortgages and other large loans that could be hurt by deflation?
A deflation of 10% means a 10% increase in wage, unless of course your boss decides to decrease your wage, but that rarely happens. So people aren't hurt by deflation unless they're in the export business.

[Truth Warrior]

http://en.wikipedia.org/wiki/Deflation_(economics)

[Zippyjuan]

He is for competing currencies. That means we will be able to get out of the FRNs and into some other currencies.

Congress does have the power to regulate the Federal Reserve so that deflation of their bills of credit cannot be done. In my opinion, the FRNs will eventually become worthless due to inflation, regardless of who becomes President, so with Ron Paul, at least we won't suffer through price controls and will have an alternative to FRNs.

Perhaps someone can explain to me how competing currencies (can people make their own money?) could lead to a more stable money supply? There are competing currencies today- dollars, euros, etc. A gold standard does not automatically endow a currency with stability or protect it from inflation or recessions.

[noztnac]

Perhaps someone can explain to me how competing currencies (can people make their own money?) could lead to a more stable money supply? There are competing currencies today- dollars, euros, etc. A gold standard does not automatically endow a currency with stability or protect it from inflation or recessions.

But it does prevent stagflation. And it also prevents the fed from debasing the value of the dollar by printing more of them.

[Zippyjuan]

Let me see if I get this. You can have inflation under the gold standard. You can have a recession or stagnant economy under a gold standard. But they cannot happen at the same time? Why not? That is not logical.

[Zippyjuan]

If the dollar is weaker, then imports cost more and our exports cost less which means that we will buy fewer imports and sell more exports which is good for the ecomomy- creating jobs here instead of shifting them overseas. A strong dollar discourages exports and encourages imports. This is not necessarily a good or a bad thing.

I understand inflation but backing the dollar with gold will not prevent it. Our dollar is backed by gold- and all other items you can buy and sell with it. It floats in a free exchange (free market) instead of a closed and fixed market which is what you have when a dollar is defined as a certain amount of gold. That is price fixing. Nixon tried price fixing in the 1970s and when it was taken off, prices soared. The dollar is just a medium of exchange. Prices go up but wages have gone up as well. The real measure is how long do you have to work to purchase an item. That is what it truely cost you.

Consider a minimum wage earner. In 1980, they made $3.10 an hour. A gallon of gas cost $1.23. http://www.terryfrazier.com/fullThread$msgNum=1621#msg1621 This person could buy (ignoring taxes) 2.52 gallons of gas. Since the chart I found goes up to 2004 on gas prices, I will use that. In 2004, the price of a gallon of gas was $2.09. Minimum wage then was $5.15. This same consumer could work one hour and buy 2.46 gallons of gas. It appears just from looking at the gas price number that the price of gas has gone up by $0.86 or 70%, but for the minimum wage worker, it really only costs him a little more time, not forty two minutes more to buy the same amount of gas as just looking at the price inlfation would suggest. He is able to buy .06 fewer gallons and at the $3.06 a gallon price that comes out to eighteen cents more he needs to earn to purchase the same amount of gas that he could in 1980. About two minutes. It has gone up, but only very slightly.

A person needs to be careful when comparing inflation numbers. As I said, prices have gone up but so have wages. If they are moving up togther, then you lose nothing. Time is the true factor of purchasing power. Money just the medium of exchange.

[Zavoi]

I understand inflation but backing the dollar with gold will not prevent it. Our dollar is backed by gold- and all other items you can buy and sell with it. It floats in a free exchange (free market) instead of a closed and fixed market which is what you have when a dollar is defined as a certain amount of gold. That is price fixing. Nixon tried price fixing in the 1970s and when it was taken off, prices soared. The dollar is just a medium of exchange. Prices go up but wages have gone up as well. The real measure is how long do you have to work to purchase an item. That is what it truely cost you.

A gold standard "fixes" the price of gold only in the same sense that the International Bureau of Weights and Measures "fixes" the speed of light. Price fixing would occur if the government mandated, say, a 30:1 ratio in the gold:silver price, but defining the dollar in terms of gold (or silver) is simply a definition of a unit.

[Zippyjuan]

Gold and the speed of light have nothing to do with each other. The speed of light is a physical constant (although different frequencies of light travel at different speeds). The price of gold can be anything we want it to be.

[gte811i]

"If they are moving up togther, then you lose nothing"

Absolutely, 100% false. Money is not just a measure of wealth or medium of exchange, it is a storage of wealth. It means that I can work my job today, have something (be it data bits, coins, paper, etc) represent the value of my work today. I can save that value for later and trade that value for something else that I would like at a later point in time-be it 5 mins, to 5 years later.

If I worked min. wage job in 1980 at the qwiki-mart making $3.10, now I work at the qwiki-mart for $6, any value of money that I saved in 1980 is cut in half-I would have been better off if I and saved 50% less in 1980 and spent it rather than saved it. That eventually leads to the inevitable, why save, I'll just go into debt b/c it will be worth less in the future. It completely distorts an economy.

It is the destruction of wealth of the long-term and a tax on the public. There are only 2 ways to solve government deficits, tax more (raise bonds, etc), print more money-thereby decreasing the time value of money and effectively increasing taxes on previously stored wealth.

From what I have gathered there are 3 main causes of inflation. 1) Massive government deficits-causing government to borrow from the Feds effectively printing money and then spending it on government programs to put it into the system. 2) Extreme low interest rate-below what the market would set-causing banks to neglect risk and to give out as many loans as possible, lax lending, etc. 3) Fraction-Reserve Banking, if BoA borrows $100 from the FED, they only have to keep $10 on hand, they loan out the rest.

A gold-standard will pretty much eliminate 1,2. Even with a gold standard 3 can thrive quite well.

[Zippyjuan]

You are correct that if you earned a dollar in 1980 and spent that same dollar in 1994 (or any other later date) you can buy less with it. That assumes that you put that dollar into a box or under your matress and not into something that offered you interest or a return on investment. If you did put it into a savings account or investment whether you were better to have spent it in 1980 depends on the return you got on investing it. If the return on investment was greater than the rate of inflation during that time, then you were better off to save it. If the return was lower, then you should have spent it earlier.

Government borrowing to finance deficits tends to raise interest rates- the more they need to borrow, the higher interest rates they normally would have to charge to atract more money. Higher interest rates increases the cost of borrowing for others like businesses that want to invest in new factories and equipment and eventually hire more people. It makes it harder for people to borrow to buy a house and then buy things to fill up their house with. This is a negative on the overall economy. There are two ways to reduce the deficit- raise taxes and/ or reduce spending. Printing more money does not help or hurt the deficit itself.

Ideally, the Fed wants to maintain a fairly steady money supply. Under Allen Greenspan, they targeted interest rates. Stable interest rates minimize uncertainty for both individuals and businesses as to what rate of return they can expect on both investments and business activity. This encourages more such activity and stimulates the economy. If interest rates are high or uncertain, then a business will expect a much higher rate of return on any investments. Stable money supply also helps contain inflation expectations and hence actual inflation (if a company expects its supplies will be raising prices, they will try to raise their prices to cover it along with their desired profit margin). This leads to a more stable economy. My concern now is that under Ben Bernanke the Fed is becoming more accomodating to Wall Street and is engaged in actions that will contribute to higher inflation -increasing liquidity [adding more money to] the market.

[Goldwater Conservative]

There's nothing wrong with natural "inflation" or "deflation." The problem is when the money supply is manipulated to cause either, since that's when it's most severe.

[Chester Copperpot]

Gresham's Law ........... "Bad money drives good money out of circulation".
http://en.wikipedia.org/wiki/Gresham's_Law

that not the correct law..

Correctly stated:

"Bad money drives good money out of circulation, WHEN THEY ARE FORCED TO TRADE AT THE SAME VALUE."

A Silver dollar floating in the economy will get snatched up because its forced to trade equally with a paper dollar.. But say it had a market value of $20, then it would stay floating in the economy unless somebody wanted to trade their 20 federal reserve notes for it,.

[Chester Copperpot]

Perhaps someone can explain to me how competing currencies (can people make their own money?) could lead to a more stable money supply? There are competing currencies today- dollars, euros, etc. A gold standard does not automatically endow a currency with stability or protect it from inflation or recessions.

There is a difference between competing currencies and currency competing with gold/silver

Remember, MONEY is gold or silver ONLY.. THats it.. What we use today is only currency. MONEY's value stays pretty consistent whereas currencies can fluctuate for a whole plethora of reasons.

[spudea]

Perhaps someone can explain to me how competing currencies (can people make their own money?) could lead to a more stable money supply? There are competing currencies today- dollars, euros, etc. A gold standard does not automatically endow a currency with stability or protect it from inflation or recessions.

No we do not have competing currencies. You can't go to your local store and purchase goods in gold, silver, or euros. You also can't be paid in anything but FRNs. Anything else is illegal.

[Zippyjuan]

There's nothing wrong with natural "inflation" or "deflation." The problem is when the money supply is manipulated to cause either, since that's when it's most severe.

I completely agree.

[Zippyjuan]

No we do not have competing currencies. You can't go to your local store and purchase goods in gold, silver, or euros. You also can't be paid in anything but FRNs. Anything else is illegal.


I guess I still don't understand what is being said about allowing competing currencies to get a more stable dollar.

[Truth Warrior]

that not the correct law..

Correctly stated:

"Bad money drives good money out of circulation, WHEN THEY ARE FORCED TO TRADE AT THE SAME VALUE."

A Silver dollar floating in the economy will get snatched up because its forced to trade equally with a paper dollar.. But say it had a market value of $20, then it would stay floating in the economy unless somebody wanted to trade their 20 federal reserve notes for it,.

We're not talking market value here. We're talking "legal value", as in legal tender laws.<IMHO>

I don't know about where you live, but I've not seen a silver dollar in circulation for decades. :)

It sure looks like a blatant manifestation of Gresham's Law, to me.

Thanks!

[spudea]

I guess I still don't understand what is being said about allowing competing currencies to get a more stable dollar.

If people were allowed to live on a different currency, then the fed would not be able to destroy the US dollar because then people would choose to deal in a different currency.

If we had a stable currency, we could save our money, instead of borrowing, borrowing endlessly.

[Zippyjuan]

So we would have another currency in addition to the US dollar? Or instead of it? Who would make it? Do we know they would do a better job than the Fed of managing it?

[gte811i]

Zippyjuan,
Where do you think the money comes from that the government spends when it has a deficit? trees? It comes from the Federal Reserve. They essentially borrow money from the Federal Reserve a quasi-for-profit-private bank. How does the Federal Reserve lend money to the government, by printing it!

Let's give a real-world example. Let's suppose this year the budget is balanced, and we work for the DoD which has multiple contracts with say Raytheon. We start a war and in order to be technologically superior we (the DoD) lobby for an increase in our budget so we can have more contracts with Raytheon to build better bombs. The DoD succesfully lobbies congress and they pass a budget that is now in the red-say $100 mil. I'm using some hand waving, but essentially the Treasury Department takes a loan from the Federal Reserve, the Feds print up $100 mil and send the money to the Treasury Department, the Treasury Department transfers the money to the DoD who in turn buys x contracts with Raytheon to build better bombs, and $100 mil is transferred to Raytheon. Raytheon in turn pays their workers more, or hires more and VUALA!! we have just injected $100 mil into the system that did not exist. Deficits DO affect the money supply!

Of course this $100 mil goes on the total deficit which of course is charged interest (to the Feds) and next year the game begins anew, but with additional interest on the $100 mil debt we took out.

As to your other point. Money is a STORAGE of wealth, why should I HAVE TO INVEST. I should be able to stick in under a rock, pick it up in 10 years and it be worth roughly the same.

The only people who truly benefit from inflation are the people who get their hands on the money 1st, which are mostly banks. I do agree, in a completely free market, deficits would cause an increase in interest rates, however what we have is far, far from a free market.

With a Federal Reserve who can lower interest rates banks don't have to raise rates b/c they can borrow money from the Feds, instead of raising interest rates and getting people to lend them money (CDs, savings, etc).

If the Feds are so great and they keep a "stable" currency, then why have the following graphs taken place?

http://www.economics-charts.com/cpi/cpi-1913.html
http://www.shadowstats.com/alternate_data

notice since we went off a gold-standard (after 1913 it was a quasi gold standard, mix between gold and fiat-after 1972? completely fiat). I'm sure the having fiat is wonderful (yeah right).

Now take a look at the following, CPI from 1800-on.

http://minneapolisfed.org/research/data/us/calc/hist1800.cfm

Notice how relatively flat the CPI is before 1913, the only times it rose was when the government ran massive deficits (Civil War) and tried to use fiat currency. Amazing!

[gte811i]

Also read the "History of Money" by Murray Rothbard, it's free downloadable in .pdf format on the internet. Before the Feds, we had multiple different currencies used in this country for money. Even up to the Great Depression there were 4-6 different types of currency notes used as currency.

In fact the word dollar actually comes from the spanish thaller, the silver coin spain used as money that the US also used for over a century. We had spanish, mexican, european coins all circulating in the country as money. The individual had his own personal freedom and choice to choose to operate in whatever currency he felt comfortable-he wasn't forced by the government to accept some stupid piece of paper with fancy print on it.