Paul Marks is revealed to be the hard man of the blogosphere!
Now I have stopped writing as an unbiased person (at least as unbiased as I can be) in my blog Monetary Policy I can get on to a question that interests me as a hard money faction Austrian School man.
Those of you with the courage to read my last blog (I should have made it more plain – but I lack the wit to do so) will hopefully know that a Austrian school man of my type believes that money should be based entirely on one commodity and that institutions that issue paper money (bills of credit, whatever) should actually have enough of that commodity to cover all their notes. Traditionally people of my sort have supported the so called ‘100%’ or ‘real’ gold standard (as opposed to the various statist frauds that have existed under the name of ‘gold standard’) – but actually any commodity might be used, and there might be competition between commodities – as there was (for example) in the Kingdom of Hanover before the mid 19th century. As long as only one commodity was used for each money and there were no fixed exchange rates between the commodities – if (for example) a certain amount of gold ‘has’ to buy a certain amount of silver then things are messed up.
Some people who read these blogs are well aware of the ‘Austrian’ arguments against Monetarists (that the concept of a ‘price level’ is too loose to be useful, that a price ‘index’ is a misunderstanding [even Hayek argued that himself at various times – but sometimes seemed to like the concept of a price index], and that the ‘money supply’ does not gush everywhere like water, but instead piles up like treacle – creating asset price bubbles, distorting relative prices and creating mal-investment).
However, I am not going to deal with all this here. My question is this – given that the world is not what I would wish it to be, just what will happen?
Traditionally a hard money man would say there will be a bust or a crack up boom. In a bust the government stops propping up the magic circle of ‘private’ financial institutions and other favoured business enterprises (by ‘increasing the money supply’) and the economy goes into slump. In a ‘crack up boom’ the government continues to increase the money supply (i.e. credit money) till there is vast open inflation (not just asset price inflation but ‘prices in the shops’) and a ‘flight from money’ occurs – and the thing comes to a terrible stop. The boom-bust cycle (with the crack up boom being far worse than a normal bust).
However, what happens if government continues to increase the credit-money supply, but not enough to create vast open ‘in the shops’ inflation? As the various speculations of the financial institutions and other favoured enterprises go wrong so the government increases its credit money supply to prop them up – but (by their very failures) the institutions’ own credit paper (‘broad money’ if you like ‘M3’ etc) shrinks – so there is not much actual change in what people see as the ‘price level’.
Well of course things become more and more inefficient as a greater and greater share of resources are devoted to propping up mal-investments – so there is general economic decline over time. But is there a formal big bust?
Readers of this should get to find out over the next few years – as governments seem determined to neither go for vast open inflation, or to allow the financial system to bust.
The economy will get worse – but in what way the process manifests itself will be very interesting.
Please take some time off from the simple process of survival, over the next few years, to observe and consider these matters. A bit of observation and thought will not reduce your survival chances (if survival is what interests you) – it may even help.
Paul Marks
