Population, Land, and Currency

  • #1

Main Question or Discussion Point

I also could have titled this thread "Argument for Fixed Money Supply". First of all the term 'value' will be defined as: "relative worth, merit, or importance". Also fixed: "not subject to change" This argument is based on two truths:

1. Population dictates the value of land. The value of land will increase according to an increase in population. There is a fixed suppy of land available on Earth. Increase in demand through an increase in population relative to fixed supply of land will increase land values.

2. A fixed money supply in relation to a growing population will lead to a growing demand for each unit of currency. This growing demand for each unit of currency in relation to a fixed supply will increase the value of each unit of currency. Population dictates the value of currency if money supply is fixed.

In a fixed money supply economy, population dictates the value of both land and currency. A rise in population= a rise in value of both land and currency based on supply and demand.

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Hmmm.......
 
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Answers and Replies

  • #2
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Land use and value gets stratified in so many ways. Generally, you're right that land gets relatively scarcer as population increases but there are so many other factors. Increasing population density can, for example, stimulate cultural adjustments that multiply utility of space per unit ground area. Multistory building is just one example. Another example might be infrastructural changes that allow more people to live and work comfortably within a smaller area.

Also, as uninhabited land becomes scarcer it becomes more valuable. This could cause large amounts of money to be invested in acquiring large blocks of uninhabited land, which could help depreciate land in densely populated areas to make dwellings more affordable. The people in the denser areas could then visit the large ecological land preserves as recreation, which could contribute to their ability to live in denser urban situations.
 
  • #3
All those things may be true. Consider the alternative. In fractional reserve banking the money supply is consistently growing. That means that with population growth, land is also rising except that the currency is becoming less valuable making land twice as expensive in relation. To a consumer in a fixed money supply economy land prices remain fairly stable. Meaning that throughout generations and generations it remains equal affordable.The value of land grows with the unit of currency. This is really about the relation between population, land and CURRENCY. If we had adopted this monetary policy instead of fractional reserve banking we would not be in the same predicament we are in right now. It is only going to get worse. If there was a fixed money supply there would be no boom, no bust, no housing bubble, no rising unemployement, no rising healthcare costs. Much less inefficiencies. The entire world would be better off in everyway. Not only would the whole world be better off, but we would not be facing an impending economic collapse. I am suprised there are not more replies.
 
  • #4
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That means that with population growth, land is also rising except that the currency is becoming less valuable making land twice as expensive in relation. To a consumer in a fixed money supply economy land prices remain fairly stable. Meaning that throughout generations and generations it remains equal affordable.
Land prices do not necessarily remain stable just because the money-supply is stable. E.g. if a lucrative factory is built in a particular area, the money the factory brings in will make it valuable along with the value of surrounding land if the employees invest their profits and pay in buying land and adding to its value. Close the factory due to unprofitability and it along with surrounding land prices will decrease as the area becomes less attractive to own and develop. There is plenty of affordable land available currently, but people don't want to buy it because it is unlikely to increase in value so they can sell it for a profit.

The value of land grows with the unit of currency. This is really about the relation between population, land and CURRENCY. If we had adopted this monetary policy instead of fractional reserve banking we would not be in the same predicament we are in right now. It is only going to get worse. If there was a fixed money supply there would be no boom, no bust, no housing bubble, no rising unemployement, no rising healthcare costs. Much less inefficiencies. The entire world would be better off in everyway. Not only would the whole world be better off, but we would not be facing an impending economic collapse. I am suprised there are not more replies.
Currency value is just one small part of economics. What about the ratio between land prices and the cost of building supplies? What about between finished buildings and building supplies? What about between food and healthcare? What about between air-travel and surface transit? What about between corporate salaries and service-sector salaries? All relations between other prices/costs are influential, not just between currency and a certain basket of goods or between currency and real-estate or currency and health-care or currency and other currencies.
 
  • #5
You are missing the point of this completely. I realize there are other factors. I am comparing a fixed money supply to fractional reserve. Fractional reserve banking creates money, deluting the money supply ON TOP of all those factors you pointed out. The same rules apply. Except with a fixed money supply the VALUE of land AND currency grows TOGETHER. With fractional reserve you have increased land values with population growth AND an increased money supply. Inevitibly the price of land will be IMPOSSIBLE to afford. Not to mention EVERYTHING else. That is why fractional reserve is IMPOSSIBLE to sustain just as a perpetual motion machine is IMPOSSIBLE to sustain.
 
  • #6
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You are missing the point of this completely. I realize there are other factors. I am comparing a fixed money supply to fractional reserve. Fractional reserve banking creates money, deluting the money supply ON TOP of all those factors you pointed out. The same rules apply. Except with a fixed money supply the VALUE of land AND currency grows TOGETHER. With fractional reserve you have increased land values with population growth AND an increased money supply. Inevitibly the price of land will be IMPOSSIBLE to afford. Not to mention EVERYTHING else. That is why fractional reserve is IMPOSSIBLE to sustain just as a perpetual motion machine is IMPOSSIBLE to sustain.
You can't consider the effect of reserve banking or other factors that influence the availability of money (supply) without considering how other goods and services mitigate relative spending and saving. You could be lending out money like crazy and running big spending deficits in government as well as businesses and private budgets but if people buy and sell certain goods/services for very high profit margins, those goods and services will act as a money-sink that disciplines the money supply within lower-profit exchanges. E.g. let's say antiques get very expensive and a great deal of money is changing hands in the antique trade. This could cause people to devote large proportions of their budgets to antique trading (or some other commodities), and this would put deflationary pressure on other markets/commodities.

Likewise, banks could be keeping 100% of deposits as reserves and people could privately invest their savings in high-growth sectors that could generate a whole class of big-spenders whose consumption could cause inflation even though the money supply was relatively limited. You need to do some micro-level analysis of what causes a given price to rise, what the effects of that price rising are, and how this effect "trickles" down and around to other enterprises, revenues, incomes, and prices. Ultimately a free market is not centrally controlled by one or more banks but by the interplay of various markets and production-systems/ecologies.
 
  • #7
You can't consider the effect of reserve banking or other factors that influence the availability of money (supply) without considering how other goods and services mitigate relative spending and saving. You could be lending out money like crazy and running big spending deficits in government as well as businesses and private budgets but if people buy and sell certain goods/services for very high profit margins, those goods and services will act as a money-sink that disciplines the money supply within lower-profit exchanges. E.g. let's say antiques get very expensive and a great deal of money is changing hands in the antique trade. This could cause people to devote large proportions of their budgets to antique trading (or some other commodities), and this would put deflationary pressure on other markets/commodities.

Likewise, banks could be keeping 100% of deposits as reserves and people could privately invest their savings in high-growth sectors that could generate a whole class of big-spenders whose consumption could cause inflation even though the money supply was relatively limited. You need to do some micro-level analysis of what causes a given price to rise, what the effects of that price rising are, and how this effect "trickles" down and around to other enterprises, revenues, incomes, and prices. Ultimately a free market is not centrally controlled by one or more banks but by the interplay of various markets and production-systems/ecologies.
So are you for a fractional reserve system or a fixed money supply? That is the question.

You can't consider the effect of reserve banking or other factors that influence the availability of money (supply) without considering how other goods and services mitigate relative spending and saving
I have considered the effects of the banking system alone and so have economist over decades. That is the point of the thread. I am comparing our current system to a fixed money supply. Fractional reserve is impossible to sustain. IMPOSSIBLE. So regardless of anything that could happen in business as a result of a fixed money supply, the question is which one is better? ...That question is ridiculous.... but so are the Keynesian economist ideals that have put us on the brink of collapse and also the ideals that most of the world actually shares! Anyways, after that question is decided then I'll be more than happy to work out the details. And talk about possible negative outcomes, that could then be compensated for through taxation or laws or whatever. I am all about the details, but before you start picking out the curtains, maybe we should design the foundation.
 
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  • #8
talk2glenn
So are you for a fractional reserve system or a fixed money supply? That is the question.
This is a false choice - fractional reserve banking and a fixed money supply are not mutually exclusive. You continue to have a serious misunderstanding of elementary economic principle in these threads, and to disregard attempts to correct that misunderstanding.

Given that, there's little point in continuing any discussions with you on this subject.

Fractional reserve is impossible to sustain. IMPOSSIBLE.
Why? By what standard? Every good and service provided on a market is provided on a fractional reserve basis. Is currency special, or are all markets "impossible to sustain", and by what accepted, conventional theory of economics is this true?

Look at the market for gasoline. The demand for gasoline is a function of the number of cars, the size of their tanks, and their mileage. This would be pretty simple to regress and estimate, and if we assume everybody starts from Full, you could state absolutely how much the demand for gasoline in the United States is per mile driven.

Now if you plotted this against the supply of gasoline per mile driven, you'd discover a (maybe shocking?) fact - the supply of gasoline in every tank at every service station in the nation at any given moment is a fraction of the volume necessary to meet hypothetical peak demand. That is, if every car simultaneously decided to fill up its tanks, we would run out of gas.

Does this mean that the gasoline market is "unsustainable"? How about the sock, milk, corn, water, or TV markets - in each case, the situation is the same. The reason this is OK is because the demand for any product has an impulse. The impulse for gasoline consumption is, approximately, when you have an empty tank. Not everybody in the country has an empty tank at the same time - some people have half a tank, some 3/4, etcetera. Their demand for gasoline at the moment is zero, but their pent up demand is half a tank, or 1/4 of a tank, etcetera.

Currency is no different. In an average month, my expenses are approximately $4,000 after income taxes. That is, my monthly demand for currency is $4,000. Does that mean on Monday, January 31st I need $4,000 cash? Of course not - today I only bought lunch and a cup of coffee, and spent maybe $20. So my demand for currency on Monday the 31st was $20 cash, with ~$3,980 of pent up or already met demand. So my bank only needs to keep $20 on hand to meet my demand at that moment, and so on throughout the system, such that the volume of currency in all the vaults in the country at any given day can be less than average daily demand, as long as the U factor (the error term) averages out to zero in the long run.

Now, obviously it is impossible to accurately graph the demand function for currency for an economy of any realistic scale. However, this curve can be estimated using regression models, to reasonable degrees of accuracy. These models are used by banks to successfully project their currency needs in the same way that the gas station operator successfully projects how much gasoline he'll need in his tanks. Too much gas, and you've paid storage and capital costs that could have been deferred or eliminated; too little and you weren't able to meet demand, losing sales or forcing you to take emergency loans from somebody else (both costly propositions).

I understand the myth of fractional reserve banking introducing some kind of systemic risk is pervasive, but this does not make it true. The myth that heavier objects accelerate faster due to gravity than lighter ones is also pervasive, and also untrue. There is no systemic risk. In the event that the demand for currency exceeded projections and/or stocks, and banks were unable to meet it, currency values would rise relative to, say, bonds, until eventually people would be either unable or unwilling to consume additional units of currency. This is the same mechanism that makes sure there's enough milk on store shelves to go around without spoilage, and it works remarkably well such that aggregate surpluses and shortages are virtually unheard of in market economies over any meaningful term - this is a problem unique to planned economies.

Currency is no different; there has never been a market-induced currency crisis in countries with free floating exchange rates (defined as a radical change in currency values over short terms). These crises only happen when countries are trying to maintain a fixed or target exchange rate, and become unable to do so against market forces. When the state capitulates, the pent up change in value rapidly materializes as the currency moves quickly towards market equilibrium. See Mexico, Argentina, Thailand, and Russia in the '90s. Central banks in the States and elsewhere allow their currency values to float with market tides, acting instead to smooth out or stabilize the swings in either currency values or the broader macroeconomy, instead of trying to maintain a fixed target rate environment for precisely this reason.

Finally, it does not follow that a fixed supply of currency would be preferable to a liquid supply. If the supply were fixed, as you rightly point out, a rising population would increase its value. So would a growing economy. This would necessitate a higher velocity of money, which would increase the demand for financial infrastructure to facilitate the rapid movement of money from where it wasn't needed to places it was needed. If you believe that this kind of financial environment is more risky than one with less demand for the movement of currency between parties, then a fixed currency regime is precisely the opposite direction you'd want to move in. The alternative is insufficient currency to complete all demanded transactions in the economy, which stalls growth (if the transactions simply don't happen) and/or incetivizes a movement away from the currency as the basis of trade (if the parties find another means of making the trade) - a profit maximizing option for the individuals involved at the moment but something much less efficient in aggregate than a healthy and reliable currency exchange system.
 
  • #9
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The flaw in your system is there is no leverage. Only the current land owner will be able to purchase land, given the ever-increasing cost. If land doubles in value every 10 years - you would need to own twice as much land as you're trying to purchase to meet equity requirements.
 
  • #10
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Now if you plotted this against the supply of gasoline per mile driven, you'd discover a (maybe shocking?) fact - the supply of gasoline in every tank at every service station in the nation at any given moment is a fraction of the volume necessary to meet hypothetical peak demand. That is, if every car simultaneously decided to fill up its tanks, we would run out of gas.

Does this mean that the gasoline market is "unsustainable"? How about the sock, milk, corn, water, or TV markets - in each case, the situation is the same. The reason this is OK is because the demand for any product has an impulse. The impulse for gasoline consumption is, approximately, when you have an empty tank. Not everybody in the country has an empty tank at the same time - some people have half a tank, some 3/4, etcetera. Their demand for gasoline at the moment is zero, but their pent up demand is half a tank, or 1/4 of a tank, etcetera.
This is an interesting analogy, but the amount of energy-per-gallon of gasoline doesn't change according to the rate of fuel getting injected into the engine. Well, fuel efficiency does go down when you go heavier on the gas pedal, so maybe that analogy also works for inflation after all. Regardless, he is trying to make the point that fractional reserve banking allows more money to be lent out and as this money circulates through various supply-chains, it inflates prices and thus loses value.

I agree with his general assessment that increased circulation of money is related to inflation insofar as sellers will tend to hold out for a higher price if they believe a buyer is likely to pay that price, whereas if they expect no sale they are more likely to reduce the price to induce interest. Where I disagree is I don't think that requiring high reserves would stop investment-driven spending that causes money to circulate and ultimately inflate. The only difference would be that spending driven by direct-investment could produce inflation that would not be reflected in interest rates on savings deposits. So inflation could theoretically go quite high but if bank reserves wouldn't be generating interest in the inflationary economy, savings deposits wouldn't grow with inflation. So in order to guarantee that savings deposits don't lose value with inflation, they have to be lent out at interest rates that reflect the current rate of inflation, however assessed.
 
  • #11
This is a false choice - fractional reserve banking and a fixed money supply are not mutually exclusive. You continue to have a serious misunderstanding of elementary economic principle in these threads, and to disregard attempts to correct that misunderstanding.

Given that, there's little point in continuing any discussions with you on this subjec


So there is demand for currency, and that is why we must create more money? Is that what your saying?

Finally, it does not follow that a fixed supply of currency would be preferable to a liquid supply. If the supply were fixed, as you rightly point out, a rising population would increase its value. So would a growing economy. This would necessitate a higher velocity of money, which would increase the demand for financial infrastructure to facilitate the rapid movement of money from where it wasn't needed to places it was needed. If you believe that this kind of financial environment is more risky than one with less demand for the movement of currency between parties, then a fixed currency regime is precisely the opposite direction you'd want to move in. The alternative is insufficient currency to complete all demanded transactions in the economy, which stalls growth (if the transactions simply don't happen) and/or incetivizes a movement away from the currency as the basis of trade (if the parties find another means of making the trade) - a profit maximizing option for the individuals involved at the moment but something much less efficient in aggregate than a healthy and reliable currency exchange system.
My bold

It sounds like it. So why not print more small denominations of cash? And take the larger deomination out of circulation? That way there is more cash, but not an increase in the total supply of money. I don't follow you. The idea of printing money to fill a demand for it, is a joke. Why would you print more money? Each unit of currency would become more valuable if there was a higher demand. Printing more money makes money less valuable. How is that sustainable? Explain it, I am listening. You made no comment on how land would rise to a level that was inaffordable if fractional reserve is used instead of a fixed supply. You never commented on how a fixed money supply in relation to a fixed land supply creates a situation where the demand for currency rises with the demand for land. That is a really important point you left out. Actually all you descibed was the demand for currency. And then you make the point that you don't need all your money all the time so it is good if it is in the bank so that other people can get it out if they need it. That is your second point. And then there is a myth about fractional reserve banking. I haven't been reading any myths. You believe in a mainstream view of economics. These views have already failed. The Keynesian view is illogical and mathematically impossible to sustain. Do you believe that deficit spending is a good thing too? There is no systematic risk? So the 'business cycle' that fractional reserve creates is a good thing? How about bailouts? Housing bubbles? Rising debt? Rising costs do to inflation? Am I making all of those things up? Are they also a myth? You are being condescending towards me and your whole post is explaining the demand for currency and why we need to create more to supply the demand? The mainstream view you hold still fails to recognize the problems created by it. How about healthcare costs. The total healthcare cost of a population will rise with the rise in population. If the supply of money is rising with it then the value of money is dropping while the healthcare costs are rising. Again not sustainable. If you look at two graphs: one of total money supply 1900-20?? and purchasing power of a dollar 1900-20?? you will see that they coinside. Can you explain that? How about what happens if there was a bank run? You have added nothing of value to this thread.
 
  • #12
The flaw in your system is there is no leverage. Only the current land owner will be able to purchase land, given the ever-increasing cost. If land doubles in value every 10 years - you would need to own twice as much land as you're trying to purchase to meet equity requirements.

If land values double than so does the value of currency. So no matter what the value of land is, currency will be valued the same. Let's say that there is a large expanse of land for sale. Say someone saves the money to pay for this land. Say they want to 'invest' in land.
So the money saved has had an effect on the value of currency in the market, the value has risen. It has caused prices to go down to encourage the spending of this saved money.
This someone buys the land from the seller. The price payed by the buyer for this land is based on the current demand for land but it is also based on the demand for money. If when the buyer purchased the land the demand was high that would mean the population had gone up enough to have such demand therefore the value of currency had gone up too . If this 'investor' holds onto his newly purchased land and the seller spends his newly acquired money than the value of money will go down and the price of the land will go down too. If the seller keeps his money then the demand for money will stay high. The price of land will stay the same. Until there is higher demand for land. A higher demand for land will mean there are more people that need land. If there are more people than the demand for money has also risen. The real estate investor makes no profit either way. There are no land speculators because there is no money in it. If you were to loan someone money for land over the time of the loan the value of money would rise. But so does the land. Or if there was no population change the value of money won't rise but neither will the land.
I think you get the picture.
 
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  • #13
russ_watters
Mentor
19,546
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I also could have titled this thread "Argument for Fixed Money Supply". First of all the term 'value' will be defined as: "relative worth, merit, or importance". Also fixed: "not subject to change" This argument is based on two truths:

1. Population dictates the value of land. The value of land will increase according to an increase in population. There is a fixed suppy of land available on Earth. Increase in demand through an increase in population relative to fixed supply of land will increase land values.

2. A fixed money supply in relation to a growing population will lead to a growing demand for each unit of currency. This growing demand for each unit of currency in relation to a fixed supply will increase the value of each unit of currency. Population dictates the value of currency if money supply is fixed.

In a fixed money supply economy, population dictates the value of both land and currency. A rise in population= a rise in value of both land and currency based on supply and demand.

View attachment 31775


Hmmm.......
That's a statement of a premise, not an argument. You didn't say what implications it has for the economy or why you think that's a good thing.
 
  • #14
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If land values double than so does the value of currency. So no matter what the value of land is, currency will be valued the same. Let's say that there is a large expanse of land for sale. Say someone saves the money to pay for this land. Say they want to 'invest' in land.
So the money saved has had an effect on the value of currency in the market, the value has risen. It has caused prices to go down to encourage the spending of this saved money.
This someone buys the land from the seller. The price payed by the buyer for this land is based on the current demand for land but it is also based on the demand for money. If when the buyer purchased the land the demand was high that would mean the population had gone up enough to have such demand therefore the value of currency had gone up too . If this 'investor' holds onto his newly purchased land and the seller spends his newly acquired money than the value of money will go down and the price of the land will go down too. If the seller keeps his money then the demand for money will stay high. The price of land will stay the same. Until there is higher demand for land. A higher demand for land will mean there are more people that need land. If there are more people than the demand for money has also risen. The real estate investor makes no profit either way. There are no land speculators because there is no money in it. If you were to loan someone money for land over the time of the loan the value of money would rise. But so does the land. Or if there was no population change the value of money won't rise but neither will the land.
I think you get the picture.
I know you are desperate at this point (3rd or 4th thread?) to create a scenario where your model will work - but I still don't agree. Your rule change that there will be no land speculation is invalid when the OP states "Population dictates the value of land. The value of land will increase according to an increase in population. There is a fixed suppy of land available on Earth. Increase in demand through an increase in population relative to fixed supply of land will increase land values. "

If the home buyer purchases only what they can afford a cash purchase system may work (1 to 5 years of saved wages?). On the other hand, how will wages ever be sufficient to facilitate an ever-increasing purchase price - won't rents be increasing as well?
 
  • #15
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If land values double than so does the value of currency.
Please think about this statement. If the value of a 1 acre parcel of land doubles from $10,000 to $20,000, that means that the value of $10,000 went from 1 acre to 1/2 an acre. If the value of the same parcel of land went from $10,000 to $5,000, $10,000 would buy 2 acres instead of 1. Thus the value of the money increases because it becomes worth more land. That is deflation.
 
  • #16
I know you are desperate at this point (3rd or 4th thread?) to create a scenario where your model will work - but I still don't agree. Your rule change that there will be no land speculation is invalid when the OP states "Population dictates the value of land. The value of land will increase according to an increase in population. There is a fixed suppy of land available on Earth. Increase in demand through an increase in population relative to fixed supply of land will increase land values. "

If the home buyer purchases only what they can afford a cash purchase system may work (1 to 5 years of saved wages?). On the other hand, how will wages ever be sufficient to facilitate an ever-increasing purchase price - won't rents be increasing as well?

Yes, land and rent values will go up. Just as they do now. Except the supply of money won't being going up. Demand for land will come with an increase in population, right? Demand for money will increase with population as well. Am I desperate for other people to understand this? Yea, it makes me crazy that the majority does not realize how our system now cannot sustain. How obvious it's faults are. So my question for you is can you create a scenario where the fractional reserve system would work? If you are so opposed to this theory. Then you should be able to understand how the current theory intends to deal with rising land values. Where will land prices be 100 years from now? What about inflation a hundred years from now? How about healthcare costs? Do the math. That is all I am asking.
 
  • #17
mheslep
Gold Member
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We have an entire thread here without a single reference. BP Esq, when you start a thread with a claim of "two truths", I recommend you back up the claim with referenced sources. The consequence of not doing that is a thread like this one, with hundreds of assertions and counter assertions.
https://www.physicsforums.com/showthread.php?t=414380
 
  • #18
Please think about this statement. If the value of a 1 acre parcel of land doubles from $10,000 to $20,000, that means that the value of $10,000 went from 1 acre to 1/2 an acre. If the value of the same parcel of land went from $10,000 to $5,000, $10,000 would buy 2 acres instead of 1. Thus the value of the money increases because it becomes worth more land. That is deflation.
Exactly. Where you are getting confused is the term deflation. Deflation is the opposite of inflation. Deflation with a fixed money supply is a good thing. The money increases in value as the population demands more of it.
Now the mainstream like talk2glenn says this demand for cash can only be quenched by printing more or creating more through deficit spending, or creating more with a fractional reserve requirement. This is unnecessary because the value goes up with demand. So if more cash was needed for various transactions. More smaller denominations of cash would be printed and an equal amount of money in larger denominations would be taken out of circulation. Also once you meet this demand with 'new money' you create a sort of addiction to it. I will explain.
The reason that deflation is considered a bad thing in a fractional reserve system is because it will cause a recession. Just like in the eighties when the interest rates rose in an attempt to curb rising inflation. The higher the interest rate the lower the amount of credit is available to keep spending up. If no one is spending with credit then jobs will be lost. When jobs are lost there are even less people spending and so on...This leads to more defaults on mortgages. If mortgages default then banks have to be bailed out. And 'too big to fail' companies get bailed out so they won't lay off massive amounts of employees which obviously would add to the problem. So, just as the last bailout avoided a downward spiral much like the ones that came before it, it has also put more money into the money supply.
It is like having to pay off a credit card with another credit card. Also, unsustainable as the interest and debt will eventually make it impossible for you to pay it back and you will go bankrupt. That is how the fractional reserve system works. To show you many examples of this, you can read this page on recesesion in U.S. history on wikipedia below. http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States" [Broken]
 
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  • #19
We have an entire thread here without a single reference. BP Esq, when you start a thread with a claim of "two truths", I recommend you back up the claim with referenced sources. The consequence of not doing that is a thread like this one, with hundreds of assertions and counter assertions.
https://www.physicsforums.com/showthread.php?t=414380
It is true. Land value will go up if population goes up. There is a fixed supply and a rising demand. That is a fact. Currency if it is fixed will go up in value if population goes up. There would be a fixed supply of currency and a rising demand. That is also fact.
Prove those two statements wrong.

A referenced source? The statements I made which I labelled truths are undeniable. If I claim "1+1=2", do I have to give a referenced source? The math is just as simple.
 
  • #20
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Exactly. Where you are getting confused is the term deflation. Deflation is the opposite of inflation. Deflation with a fixed money supply is a good thing. The money increases in value as the population demands more of it.
You seem to be fixated on making macro level claims that transcend the micro. Deflation is good for consumers/buyers. It is not as favorable for the supply-side, i.e. revenues and incomes. Technically, neither inflation nor deflation should matter as long as prices (i.e. everything that is purchased, including labor) are adjusting together. What happens, though, is that when inflation is occurring, revenues/incomes are going up with has a stimulating effect on people because they see their means as growing. When deflation is occurring, people resist adjusting their prices and wages downward because they have a sense of fixed currency value.

Now the mainstream like talk2glenn says this demand for cash can only be quenched by printing more or creating more through deficit spending, or creating more with a fractional reserve requirement.
When people feel like they can't live with less than a certain amount of income, they favor any means possible to get that income. No one quietly accepts total elimination of their budget, as far as I know. Some people can make due with less spending than others, though.

This is unnecessary because the value goes up with demand. So if more cash was needed for various transactions. More smaller denominations of cash would be printed and an equal amount of money in larger denominations would be taken out of circulation. Also once you meet this demand with 'new money' you create a sort of addiction to it. I will explain.
The reason that deflation is considered a bad thing in a fractional reserve system is because it will cause a recession. Just like in the eighties when the interest rates rose in an attempt to curb rising inflation. The higher the interest rate the lower the amount of credit is available to keep spending up. If no one is spending with credit then jobs will be lost. When jobs are lost there are even less people spending and so on...This leads to more defaults on mortgages. If mortgages default then banks have to be bailed out.
This is the assumption, but it is based on the premise that there's nothing anyone can do to compensate for lost income except seek new income. In other words, it assumes total dependency on money-spending for economic well-being. In reality, there are many forms of economic activity that can be undertaken without any money changing hands. To use an unrealistic extreme of this for illustration purposes, if no one needed any money for anything, there would be no reason to charge taxes or rent or any other fees for anything that didn't require labor. I.e. people would not have to manipulate each other into performing labor in exchange for land-rights. So, if you begin with such an unrealistic ideal situation and then start adding dependencies to it, you eventually arrive at the current economy. But theoretically it is possible to decrease those (inter)dependencies and make people less vulnerable to recession.

And 'too big to fail' companies get bailed out so they won't lay off massive amounts of employees which obviously would add to the problem. So, just as the last bailout avoided a downward spiral much like the ones that came before it, it has also put more money into the money supply.
It just so happens that corporate people seem to like dealing with budget cuts by laying off some employees and keeping others on at full salary or giving them raises. But they could just as easily cut wages across the board and avoid laying people off. By failing to cut the wages of employees that are not laid-off, they maintain higher costs which get passed on to consumers in their product pricing. Thus, when the laid-off people cut their spending to deal with their reduced budgets, their ex-company's revenues drop as a result. This effect could be reduced by reducing wages and costs and keeping people on part-time instead of laying them off completely.
 
  • #21
mheslep
Gold Member
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It is true. Land value will go up if population goes up. There is a fixed supply and a rising demand. That is a fact. Currency if it is fixed will go up in value if population goes up. There would be a fixed supply of currency and a rising demand. That is also fact.
Prove those two statements wrong.
That's not how it works at PF - you post unsourced claims of fact and demand others prove you wrong. Given that the price of residential housing is _still_ falling in the US even though population increased with the last census, you need to show proof, or relable your post as a your personal proposition. No more handwaiving, provide a source. Also while the supply of land may be fixed, the supply of dwellings on that same supply of land is not. Last chance.
 
  • #22
.1.You seem to be fixated on making macro level claims that transcend the micro. Deflation is good for consumers/buyers. It is not as favorable for the supply-side, i.e. revenues and incomes. 2.Technically, neither inflation nor deflation should matter as long as prices (i.e. everything that is purchased, including labor) are adjusting together. What happens, though, is that when inflation is occurring, revenues/incomes are going up with has a stimulating effect on people because they see their means as growing. When deflation is occurring, people resist adjusting their prices and wages downward because they have a sense of fixed currency value.
1.If revenues are income. Then revenues-overhead=profit. In order to maintain the same profits both revenues and overhead must stay the same in relation to each other. If more money is introduced into the economy there will be a spike in incomes or revenues of businesses do to increased spending. This will also translate into higher overhead for the company. The profits end up as an average over the course of the 'business cycle'(which has been created by inflation and deflation).

2.It is true that prices of goods may go down due to market competition, this does compensate for the rise in inflation. This does not mean that inflation is ok because the rising prices have been compensated for. What you cannot compensate for is land prices.
You also cannot compensate for healthcare. You cannot outsource healthcare jobs to China to lower your overhead. You cannot put people on a conveyor belts and send them through the hospital like you could in the manufacturing of goods. Automated factories have decreased overhead costs of manufacturing enormously. So has outsourcing jobs to countries like China. It is not possible to compensate for inflation this way in the healthcare sector. It is also not possible to make land any less valuable as long as the population continues to grow. You have to think about the things that market competition can not make cheaper. Regardless of what the prices are, the growth in money supply will always lead to the devaluation of the currency. Always.


This is the assumption, but it is based on the premise that there's nothing anyone can do to compensate for lost income except seek new income. In other words, it assumes total dependency on money-spending for economic well-being. In reality, there are many forms of economic activity that can be undertaken without any money changing hands. To use an unrealistic extreme of this for illustration purposes, if no one needed any money for anything, there would be no reason to charge taxes or rent or any other fees for anything that didn't require labor. I.e. people would not have to manipulate each other into performing labor in exchange for land-rights. So, if you begin with such an unrealistic ideal situation and then start adding dependencies to it, you eventually arrive at the current economy. But theoretically it is possible to decrease those (inter)dependencies and make people less vulnerable to recession.
This is not an assumption at all. People in our system must seek new income. If you cut down on your own spending then you lower someone else's income. If you lower someone else's income they must cut spending and so on until banks start falling due to defaults. If they are allowed to fall it is game over for the dollar. The thing is it is only delaying that inevitable crash. In response to your scenario: Our economy is the result of design. It is not some kind of natural progression that led us here. Recession in our economy is man made.
It is from contraction of credit. Just as an economic boom is the expansion of credit.

It just so happens that corporate people seem to like dealing with budget cuts by laying off some employees and keeping others on at full salary or giving them raises. But they could just as easily cut wages across the board and avoid laying people off. By failing to cut the wages of employees that are not laid-off, they maintain higher costs which get passed on to consumers in their product pricing. Thus, when the laid-off people cut their spending to deal with their reduced budgets, their ex-company's revenues drop as a result. This effect could be reduced by reducing wages and costs and keeping people on part-time instead of laying them off completely.
Underemployement causes the same problems as unemployement. If I get a pay cut I have to cut down on my spending. This leads to the same downward spiral that unemployment creates. All that does is spread it out amongst everyone in the company. It will still lead to the same drop in business revenues for businesses that rely on consumer spending. This drop in revenues will cause that business to lay off workers or cut everyone's pay and so on...When you have an economy that is based on credit it must continue to be supported by this credit or a downward spiral will result.
What your not understanding is that from the very beginning of a fractional reserve system, when the first new money was created through loaning it started a growth of businesses. It also gave people money to spend on those businesses. From that point on the whole economy built a need for this credit.
So the survival of the first newly created businesses is dependant on the money that was created and loaned to the consumers. So when mainstream ecomomist say that a little inflation(created by the influx of new money) is good because it creates growth, the problem they are not recognizing is it relies on this new money to keep flowing. So why would anyone want this boom bust cycle? Well, in a recession prices are lower due to the increase in demand for cash. So if you are rich you can buy up say, real estate because you know that credit will again expand or else the system will crash. So when that credit is back spending will increase and the demand for cash is lower. This makes the price of real estate go back up. Then you sell your real estate and make the profit. So the rich get richer in this business cycle because they have the cash to take advantage of the lower prices. Now do you see?
 
  • #23
That's not how it works at PF - you post unsourced claims of fact and demand others prove you wrong. Given that the price of residential housing is _still_ falling in the US even though population increased with the last census, you need to show proof, or relable your post as a your personal proposition. No more handwaiving, provide a source. Also while the supply of land may be fixed, the supply of dwellings on that same supply of land is not. Last chance.
http://www.investopedia.com/university/economics/economics3.asp" [Broken]

How's that? Once again I have labelled my statements truths because they are true.
I can get more sources to expain the LAW of supply and demand if you'd like. And once again my thruths state: "a fixed supply in relation to a rising demand creates a rise in value proportionate to the rise in demand."

Value does not necessarily mean price as you pointed out
here:

Given that the price of residential housing is _still_ falling in the US even though population increased with the last census
 
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  • #24
503
0
1.If revenues are income. Then revenues-overhead=profit. In order to maintain the same profits both revenues and overhead must stay the same in relation to each other.
Capitalism isn't a economic system that starts by setting a profit level, then takes fixed overhead into account, and finally sets revenue targets to meet goals. That may be the strategy of individuals/firms, but a free-market works by each buyer attempting to get the lowest prices to reduce their overhead as much as possible. This is why there is competition on the supply side.

If more money is introduced into the economy there will be a spike in incomes or revenues of businesses do to increased spending. This will also translate into higher overhead for the company. The profits end up as an average over the course of the 'business cycle'(which has been created by inflation and deflation).
It really depends how the money is injected and how it is used. If it would be invested into firms with a competitive edge against price-leaders, the increased competition could put pressure on the price-leader to further innovate its supply-chains and produce more competitive prices. However, if the money-injections are used to insulate high wages against cuts, prevent, layoffs, etc. - i.e. prevent cost-cutting, then price-competition is averted and market evolution is postponed.

2.It is true that prices of goods may go down due to market competition, this does compensate for the rise in inflation.
Inflation = rising prices. Falling prices = deflation.

What you cannot compensate for is land prices.
You also cannot compensate for healthcare. You cannot outsource healthcare jobs to China to lower your overhead. You cannot put people on a conveyor belts and send them through the hospital like you could in the manufacturing of goods.
What do you mean by compensate? Land prices rise and fall like any other commodity, based on supply and demand. Values are relative to other values, not absolutely determined by the total supply of the commodity. BTW, you CAN outsource various health-care work in many ways. I wouldn't be surprised if online diagnoses via webcam become popular. Surely doctors can talk to you about your issues and examine your body via webcam - and consumers and insurance companies will probably be interested if there is money to be saved. People like to get ahead, especially when they're on a tight-budget financially.

Automated factories have decreased overhead costs of manufacturing enormously. So has outsourcing jobs to countries like China. It is not possible to compensate for inflation this way in the healthcare sector. It is also not possible to make land any less valuable as long as the population continues to grow.
Urban densification makes it possible to house more people on less land. This increases land prices in densified urban areas while rural land decreases in value because it becomes culturally less popular to live in rural or suburban sprawl. Gas prices and vehicle-costs help stimulate the choice to forego allotting relatively large chunks of one's income to vehicle-costs.

You have to think about the things that market competition can not make cheaper. Regardless of what the prices are, the growth in money supply will always lead to the devaluation of the currency. Always.
If people would save the income they gain from money supply growth and not spend it, how would it cause inflation? Prices go up when there is a bidding war over existing commodities. No bidding war = no inflation. Price competition = deflation. Therefore, conservation = price competition = deflation and waste/inefficiency/increasing-consumption = bidding war = inflation. Money supply changes may influence behavior and expectations of consumers, investors, business controllers, etc. but it is not determinant.

This is not an assumption at all. People in our system must seek new income. If you cut down on your own spending then you lower someone else's income. If you lower someone else's income they must cut spending and so on until banks start falling due to defaults. If they are allowed to fall it is game over for the dollar. The thing is it is only delaying that inevitable crash. In response to your scenario: Our economy is the result of design. It is not some kind of natural progression that led us here. Recession in our economy is man made.
Fixed cost fixation is the main psychological factor in inflation and resistance to deflation. It is as strong a factor, imo, as the belief that property prices never drop were in causing the housing boom. People can choose whether they want the economy to be driven by psychological beliefs or material scarcity and abundance. As long as they opt for psychological determinism, there is no point in discussing economics except as a marketing ploy to influence the psychology behind market behavior.

It is from contraction of credit. Just as an economic boom is the expansion of credit.
Credit is not the traditional cause of economic boom. Economic boom is supposed to occur when businesses and consumers are innovative and find ways of doing more with less (i.e. more efficient productivity). When they do this, abundance is the result, which depreciates prices and makes it possible for population growth because more people can live from the available resources.

Underemployement causes the same problems as unemployement. If I get a pay cut I have to cut down on my spending. This leads to the same downward spiral that unemployment creates.
Compare an economy where half the people are laid off and one where everyone takes a 50% pay cut. In the second situation, the overall deflation of wages results in uniform price-cuts which makes it possible to maintain consumption-levels, production-levels, and per-capita employment as long as productivity isn't lost due to decreased labor input. In the first situation, half the people end up doing all the work while the other half tax them or otherwise take money from them in order to afford prices that are inflated by the high wage levels of employed workers.

All that does is spread it out amongst everyone in the company. It will still lead to the same drop in business revenues for businesses that rely on consumer spending.
Unless prices are reduced, in which case everyone would go on consuming the same amount they did before their hours were cut, provided that productivity-levels are not impaired by reducing the total labor-hour input.

This drop in revenues will cause that business to lay off workers or cut everyone's pay and so on...When you have an economy that is based on credit it must continue to be supported by this credit or a downward spiral will result.
What makes you assume that revenues will catch up with costs once the economy adjusts?

What your not understanding is that from the very beginning of a fractional reserve system, when the first new money was created through loaning it started a growth of businesses. It also gave people money to spend on those businesses. From that point on the whole economy built a need for this credit.
Because inflation caused people's bills to exceed their income.

So if you are rich you can buy up say, real estate because you know that credit will again expand or else the system will crash. So when that credit is back spending will increase and the demand for cash is lower. This makes the price of real estate go back up. Then you sell your real estate and make the profit. So the rich get richer in this business cycle because they have the cash to take advantage of the lower prices. Now do you see?
You need to realize that investments are marketed, which involves generating reasons that investment purchases will appreciate for resale at a profit. In a depreciating market, people are wanting to buy in and then have their commodity appreciate - but it is just as possible that people will buy in and by doing so end up taking a share of depreciation as the commodity continues to depreciate. The person who ultimately wins out in a deflationary market is the person who buys the commodity to use it, because it doesn't matter to that person what the resale price is. They buy a house when they can afford it and live in it as long as they can. This is of course the same for cars, farm land, or any other commodity. When people want to USE what they buy, they buy it and use it for that purpose. The only thing that can interfere with them is when things like taxes and debt threaten to take their property away if they don't use it to generate profit. That can be a problem in a deflationary economy because revenues can be much harder to come by when people are trying to save for a future when prices are lower.
 
  • #25
Inflation = rising prices. Falling prices = deflation.
Since it would take too long to correct all the mistakes you made in that last post, let's get this one straight......

When you add money to the money supply, which is measurable, you lower the demand and inflation is the result.http://en.wikipedia.org/wiki/Money_supply" [Broken]

The price of various goods cannot accurately measure inflation!

Prices can be affected my market competition. If two companies that sell the same product are competing for the top spot in the market. Prices are lowered through competition.
If the price of that same product is measured 1 year apart it would be lower than the previous year. CPI, which measures inflation would not get an accurate reading of the increase in the money supply because the price has been affected my market competition not the increase in money supply. CPI measures price. Not money supply. Yet it is considered by the mainstream to be accurate? That is only making it easier to decieve people into believing that the 'economists' of the world are looking out for their best interest.

I am not sure why you and the majority continue to ignore this problem? I have clearly stated major obvious problems associated with fractional reserve banking and yet they are being ignored! This information seems to only fall on deaf ears. No one seems to want to face the reality of the situation. It is as if there is an asteroid visibly on a collision course with earth and no one wants to believe it, even if it is clearly right in front of them.
I am not the only one that understands this. But man it is really really frustrating. It is not like it is difficult to understand, I am not claiming to be more intelligent than you, it is just that it seems almost unbelievable that something so simple has evaded you after all this time. Please read my previous post again and do some research on the statements I have made. If you are only on a mission to prove my statements wrong, you will learn nothing.
 
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