Cryptocurrency: Fixes Fiat That Was Broken By BankGovPol Since At Least 1913

grarpamp grarpamp at gmail.com
Tue Jan 10 21:21:00 PST 2023


https://mises.org/wire/present-fiat-monetary-system-breaking-down
https://mises.org/library/man-economy-and-state-power-and-market
https://mises.org/library/capital-and-production-0
https://mises.org/library/austrian-taxonomy-deflation-applications-us

The Present Fiat Monetary System Is Breaking Down

Authored by Frank Shostak via The Mises Institute,

The heart of economic growth is an expanding subsistence fund, or the
pool of real savings. This pool, which is composed of final consumer
goods, sustains individuals in the various stages of the production
process. The increase in the pool of real savings permits the
expansion and the enhancement of the infrastructure, and this
strengthens economic growth. An increase in economic growth for a
given stock of money implies more goods per unit of money. This means
that economic growth, all other things being equal increases the
purchasing power of money.

Note that most individuals are likely to strive to improve their
living standards. This means that individuals are likely to aim at
expanding the pool of real savings, which will in turn strengthen
economic growth and the purchasing power of money. In the framework of
market-selected money such as gold, the purchasing power of money is
likely to strengthen over time.

According to Joseph Salerno,

    Historically, the natural tendency in the industrial market
economy under a commodity money such as gold has been for general
prices to persistently decline as ongoing capital accumulation and
advances in industrial techniques led to a continual expansion in the
supplies of goods.

Hence, in the framework of a gold standard, the purchasing power of
financial assets such as stocks and bonds is likely to strengthen
alongside economic growth. Note that stronger economic growth, all
other things being equal, implies a strengthening in the pool of real
savings; i.e., the pool of final consumer goods.

Under the present monetary standard—i.e., the paper standard—an
increase in the quantity of money, because of the loose policy of the
central bank, undermines the pool of real savings and in turn
undermines economic growth.

(Observe that loose monetary policy sets in motion an exchange of
nothing for something.)

As long as the pool of real savings is expanding, the increase in the
money supply creates the illusion that the central bank can generate
real economic growth and strengthen assets’ purchasing power. However,
once the pool of real savings comes under pressure because of the
monetary pumping, the growth in assets’ purchasing power starts to
slow. According to Richard von Strigl,

    Let us assume that in some country production must be completely
rebuilt. The only factors of production available to the population
besides labourers are those factors of production provided by nature.
Now, if production is to be carried out by a roundabout method, let us
assume of one year’s duration, then it is self-evident that production
can only begin if, in addition to these originary factors of
production, a subsistence fund is available to the population which
will secure their nourishment and any other needs for a period of one
year. . . . The greater this fund, the longer is the roundabout factor
of production that can be undertaken, and the greater the output will
be.

The Subsistence Fund and Money

When producers exchange their produce for money, they can then
exchange their money for various consumer goods; i.e., they can access
the subsistence fund whenever they deem this necessary. When an
individuals exchanges their money for goods, this is an act of
exchange and not an act of payment—money is just the medium of
exchange. Payment is made by means of various goods.

For instance, a baker pays for shoes by means of the bread he
produced, while the shoemaker pays for the bread by means of the shoes
he made. (Both shoes and bread are part of the subsistence fund, as
they are final consumer goods.) When the baker exchanges his money for
shoes, he has already paid for the shoes with the bread that he
produced prior to this exchange.

Trouble erupts when, on account of loose monetary policies, a
structure of production emerges that ties up much more consumer goods
than it creates. This excessive consumption relative to the production
of consumer goods leads to a decline in the subsistence fund, meaning
that there is less economic support for the individuals that are
employed in the various stages of the production structure. This
results in an economic slump.
Intermediate Goods

What about a producer of intermediate goods, like a producer of a
special tool—what is his contribution to the subsistence fund?

An individual who exchanges his money for the tool will employ the
tool in the production of final consumer goods or in the production of
other tools and machinery that, in turn, will contribute to the
production of final consumer goods sometime in the future. The
producer of the special tool does not directly supply final consumer
goods. However, he does offer means to secure these goods. He also
offers time.

According to Murray Rothbard:

    Crusoe without the axe is two hundred fifty hours away from his
desired house; Crusoe with the axe is only two hundred hours away. If
the logs of wood had been piled up ready-made on his arrival, he would
be that much closer to his objective; and if the house were there to
begin with, he would achieve his desire immediately. He would be
further advanced toward his goal without the necessity of further
restriction of consumption.

Now, what about education and the arts? Should we include them in the
subsistence fund? Without the availability of consumer goods that
sustain individuals, education and the arts are likely to be lower on
individuals’ priority lists.

Once the individuals’ living standard increases, all these things
become affordable to them. Hence, anything that undermines the
subsistence fund undermines the ability to live like human beings, as
opposed to existing like other animals.
The Purchasing Power of Financial Assets and Monetary Liquidity

An important factor that causes fluctuations in financial asset prices
is monetary liquidity. Monetary liquidity depicts the interaction
between the supply and the demand for money. Now, the increase in
liquidity—an increase in the supply of money relative to the demand
for money—does not enter all asset markets instantaneously. It enters
various markets sequentially. Note that the price of an asset is the
amount of money paid for the asset.

When money enters a particular asset market, there is now more money
per unit of the asset. This means that the price of the asset in this
market has gone up. After a time lapse, once investors have adopted
the view that the asset is overvalued, they move the monetary
liquidity to other asset markets. This shows that there is a time lag
between changes in liquidity and changes in the average price of
assets.

Observe that the increase in the momentum of asset prices is driven by
the increase in the lagged liquidity momentum. Conversely, a decline
in the liquidity momentum after a time lag results in a decline in the
momentum of asset prices. It would appear that the monetary liquidity
is the key driver of asset prices. This is not the case. The pool of
real savings, which gives rise to economic growth, determines the
purchasing power of assets in money terms.

Notwithstanding the popular view that increases in the money supply
can help grow the economy, money cannot do such things. More money
cannot replace real savings that sustain individuals in the various
stages of production. According to  Rothbard, this is revealed once
the pool of real savings starts to decline and the central bank’s
monetary pumping becomes ineffective in reviving the pace of economic
activity.

In the framework of market-selected money such as gold and in the
absence of a central bank, an increase in assets’ purchasing power is
going to reflect an increase in the pool of real savings and thus
economic growth.

Central bank policies, however, curtail investors’ ability to
distinguish wealth-generating activities from non-wealth-generating
ones; i.e., bubble activities. An increase in money supply masquerades
as an increase in real wealth. This results in erroneous investment
decisions. Hence, all other things being equal, the exchange value of
assets is set by the pool of real savings. Changes in monetary
liquidity because of central bank policies cause disruptions known as
bull-bear markets.
Summary and Conclusions

An important factor that appears to drive financial asset prices is
monetary liquidity, defined as the growth rate in money supply minus
the growth rate in the demand for money. This is not the case. The
pool of real savings gives rise to economic growth, which for a given
stock of money determines the purchasing power of assets.


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