Cryptocurrency: Economic Morons Declare Debasement Is Moral

grarpamp grarpamp at
Fri Nov 26 15:30:26 PST 2021

Joe Weisenthal Thinks Debasing The Dollar Is The Moral Thing To Do

Joe Weisenthal is an editor and host at Bloomberg who has recently
been using his large Twitter platform to cast stones at the inflation
hawks. In one recent thread, Weisenthal mocked the people worried
about the falling purchasing power of the US dollar, and claimed in
fact that it would be immoral for currency to maintain its value over

As we’ll see, although Weisenthal’s thought experiment of a time
traveler is a bit whimsical, it provides a good opportunity for us to
explore the underlying economics. The whole episode underscores, once
again, why the Austrian school provides the public with a beacon of
light amid the confusion of our financial punditry.

Weisenthal’s Time Traveler

Below is the original tweet, which is largely self-explanatory, though
interested readers can see me grappling with Weisenthal by clicking

In context, Weisenthal (and Adam Singer) are poking fun at the Ron
Paul–types who are upset at the steady decline in the dollar’s
purchasing power since the Fed was formed in late 1913. Weisenthal
thinks it is absurd to expect that actual currency would maintain its
market value over the course of a century. Why, what would such a
“hoarder” have done to benefit society all that while?
Shrinking the Time Scale

To cut to the chase, Weisenthal is completely mistaken: there was
nothing immoral about the classical gold standard and its maintenance
of the dollar’s purchasing power over long stretches. But it will be
easier to pinpoint the flaw in Weisenthal’s thinking if we first
consider a simple story.

Suppose Joey is a teenager who cuts lawns for extra income and he
typically makes $25 a weekend. Joey wants to buy a $300 Xbox, so he
saves his weekly lawn-mowing money under his mattress. After three
months, Joey takes the saved $300 in cash to the mall and buys the
coveted electronics.

Does Joe Weisenthal have a problem with this scenario? Did the market
economy function immorally by allowing Joey to transfer his purchasing
power from the start of the summer to the end of the summer? Was Joey
supposed to have done something in addition to cutting lawns to earn
the ability to defer his potential consumption through time?

I trust Weisenthal would not object to Joey saving up his currency
over the summer. But then, what is the principled difference between
Joey’s three-month deferral and Weisenthal’s time traveler who
executed a hundred-year consumption deferral?
Present Goods Trade at a Premium for Future Goods

In fact, not only should a time traveler not be penalized for
deferring consumption a century, he should be actively rewarded. This
is because present goods are more valuable than future goods. (Note
that we are here getting into some very technical issues. The
interested reader can check out my three-part podcast series—one, two,
and three—to hear the intricate details of interest theory in the
Austrian tradition.)

So to go back to the original tweets, if a guy in 1921 has two
quarters in his pocket, and that would be enough for him to buy a
delicious hamburger, then for his willingness to effectively trade
away his 1921 hamburger for a burger to be delivered in 2021, the guy
should at least get to trade at par. And in fact, he would (normally)
be able to obtain a promise for more than one burger in the future,
since the former are more valued. (This is no more mysterious than one
present burger trading for more than one present hot dog.)

It’s easy to understand why, subjectively, people would need to be
promised a greater number of goods in the future to give up
potentially consuming their goods today. But how, mechanically, can
the borrowers deliver on these promises? How is it possible,
technologically speaking, to transform 100 units of present goods into
(say) 150 units of future goods?

The answer is that the longer we are willing to wait, generally
speaking, the greater physical output we can obtain for a given amount
of today’s inputs. Eugen von Böhm-Bawerk famously referred to the
superior physical productivity of wisely chosen, more roundabout
processes. For example, if a man is in the woods and wants to get
water from a stream into his nearby cabin, he has different techniques
he could use.

A very fast and direct method is to cup his hands and run back and
forth from the stream to his cabin. This delivers some water to his
cabin very quickly, but the yield—measured in gallons of water per
hour of his labor—is also very low.

An intermediate method would be to hollow out two coconuts to make
little buckets, and then go back and forth armed with the newly
created capital goods. This would take longer to get the initial water
to his cabin, but once the process is underway, it would deliver far
more gallons per hour of invested labor—even including the time spent
constructing the buckets.

Finally, the man might take several months digging a small path from
the stream to his cabin, so that the water flowed directly to him.
Once completed, his renovations would be extremely productive if we
measure in terms of water volume per hour of his labor time.

And so we see society would be willing and able to reward Weisenthal’s
hypothetical time traveler for earning $100 in 1921 and then
postponing his consumption for a century. The real resources that
would have gone into satisfying him in 1921 would be freed up to be
invested in longer processes, which had a higher physical yield. To
put it simply, it makes perfect sense that a 1921 hamburger would
trade on the forward market for several 2021 hamburgers.
Bonds versus Cash

We can really see the weakness in Weisenthal’s analysis if we suppose
the time traveler took his original cash and deposited it into a
savings account at the bank. Would it be immoral for a bank account to
have $100 in 1921, and to grow to more than that amount by 2021?

Or for another example, what if the time traveler from 1921 initially
bought a very long-term bond that would come due in 2021? The time
traveler jams the bond into his pocket, activates the time machine,
and shows up at Weisenthal’s doorstep. He asks Joe to help him cash
his matured bond (and working at Bloomberg, Weisenthal is just the
guy). The time traveler is pleased to discover that the nominal
interest he earned on the hundred-year bond is just enough to have
maintained his purchasing power, since goods are much more expensive
than the traveler is used to seeing. Has the market economy behaved
immorally by allowing such a transaction to occur?

In principle, the same type of intertemporal trade occurs if people
invest their savings not in bank account balances or bonds, but
instead in the accumulation of actual cash. Even here, the initial
drop in consumption frees up real resources that can be channeled into
the production of a greater amount of future goods. As Ludwig von
Mises explains in Human Action:

    If an individual employs a sum of money not for consumption but
for the purchase of factors of production, saving is directly turned
into capital accumulation. If the individual saver employs his
additional savings for increasing his cash holding because this is in
his eyes the most advantageous mode of using them, he brings about a
tendency toward a fall in commodity prices and a rise in the monetary
unit's purchasing power. If we assume that the supply of money in the
market system does not change, this conduct on the part of the saver
will not directly influence the accumulation of capital and its
employment for an expansion of production. The effect of our saver's
saving, i.e., the surplus of goods produced over goods consumed, does
not disappear on account of his hoarding. The prices of capital goods
do not rise to the height they would have attained in the absence of
such hoarding. But the fact that more capital goods are available is
not affected by the striving of a number of people to increase their
cash holdings. If nobody employs the goods—the nonconsumption of which
brought about the additional saving—for an expansion of his
consumptive spending, they remain as an increment in the amount of
capital goods available, whatever their prices may be. Those two
processes—increased cash holding of some people and increased capital
accumulation—take place side by side.

It is a fascinating topic to ponder the ideal money (if such a concept
makes sense) and whether its purchasing power would fall, rise, or
remain steady over long periods. What we can say for certain is that
rapid and unpredictable changes are undesirable, because a wildly
fluctuating money defeats the effectiveness of monetary calculation,
which is one of the underpinnings of civilization itself. To wit,
double-entry bookkeeping only works when the money units of revenues
and costs are comparable.

Contrary to Joe Weisenthal’s musings, there is nothing immoral if a
money retains its purchasing power over long stretches. In general,
when people channel their savings into conventional vehicles (such as
bank accounts or bonds), this frees up real resources that can be used
to yield a greater physical amount of output down the road. In
principle, holding currency could be merely a different financial
asset for achieving the same purpose.

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