March 15, 2013

A DEFLATIONARY EPOCH:

A new era for gold? (Izabella Kaminska, Mar 15, 2013, Financial Times)

Money debasement doesn't seem a viable threat in a world facing ongoing deflation rather than inflation, since debasement only helps to spread the wealth which would otherwise concentrate in the hands of savers and safe fixed income asset holders (in a totally disproportional sense). Consequently, debasement helps to keep the system stabilised, making it a vital central banking tool.

The quantity theory of money, meanwhile, is all too often quoted forgetting the output part of the equation. It's the velocity of money and the quantity that matters, but always as relative to output. If output is accelerating more quickly than the quantity of money or its velocity, there is no risk of inflation, since no shortage of goods prevails. Furthermore, output doesn't necessarily mean growth as measured by GDP, including as it does almost anything that's free as well as monetised.

As free goods become increasingly plentiful throughout the economy, and people learn to recycle, swap and exchange goods without monetary transaction, it becomes very difficult to engineer an inflation problem.

Posted by at March 15, 2013 9:20 PM
  

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