[quote=4plexowner]”BTW, the other problem with a currency tied to a particular commodity – especially a scarce commodity little tied to GDP as a whole – is that by it’s nature, any fixed relationship to that commodity will result in deflationary pressure”
why is this a problem? it makes sense to me that over time, manufactured goods and perhaps even services should decline in price because of increasing efficiency – seems like a good thing
“which harms investment (since dollars become more valuable over time if they are worth a fixed amount of a rare commodity). This occurs because productivity, due to technological enhancements and population increase goes up much faster over time than the commodity supply does.”
again, why is this a problem? perhaps the world’s economies only need to grow (or can accommodate) 2-3% growth rates (which seems like the annual limit on increasing the planet’s stash of above ground gold)
perhaps it is the implementation of fiat currencies that enables the push for growth rates of 5-6% and thereby enables the economic boom-bust cycles
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There are several problems. First of all is that if your dollar gains in purchase power over time, there is less of an incentive to invest (since you’re investing in products or services which will be worth less in terms of the dollar in the future), which means there is less market capitalisation, which, of course, will limit market growth. As you pointed out, this is not altogether a bad thing, as it does also limit the scope of bubbles. As sdduuude pointed out, it does increase the value of savings (which is a good thing). Overall though, I think it’s limiting effects on growth hurts more than the increased savings it fosters.
However, there’s a second facet – as a fixed amount of money (or at least an amount of money which is growing slower than population and productivity) is paid out to a growing population base, people must be paid less as well. And, human nature being what it is, those with the power to determine this relationship will typically not accept those pay cuts, while forcing those at the bottom to accept both their share of the pay cuts as well as those in powers share. So, although products and services cost less (vs. the dollar), the average pay is ALSO less – and even moreso because the wealth gap is likely growing at the same time. It’s economic growth which makes things more affordable over time.
As a note though – the boom-bust economic cycle was well documented (and had several examples of much larger booms and busts, including the Great Depression, but also including many economic bust cycles before that) long before the abandonment of the gold standard, so I think that though it would most likely slow down economic growth, it doesn’t appear that economic growth by itself being slowed has a real effect on the economic cycle. Bear in mind, that with the deflationary effects of a commodity based currency, while the actual percentage loss in a given cycle might not be as great, it is felt more, because money is worth less at the end of a cycle than it was at the beginning of the cycle.
