> Ed, > > Couple of things. > > You said: > > ED : "There is plenty of liquidity (money) in the economy, but people prefer to > hold (or "hoard") it rather than invest or spend it. I'm not quite sure of > why they behave this way, but it may be because, under conditions of > considerable uncertainty, they see the potential return on their investment > or expenditure as being negative - i.e., under the circumstances, they are > being "rational maximizers" by holding onto their money." > > HARRY :What do they do "with their money"? Put it under the mattress, where > it still loses value, but without any interest to offset the loss?
They keep it where they think it's safe. Mine is in a mix of bonds, mutual funds and safe stocks which are easily convertable to cash, and I'm leaving it right there for the time being instead of spending it or investing it in something new or different. Some people may indeed stuff it under their mattrasses. > The present campaign, asking us to spend our way out of recession is > nothing short of ludicrous - unless your controlled economy is coming apart > at the seams and you'll try anything - absolutely anything. Why is it ludicrous? Roosevelt tried it during the 1930s. Wartime spending ended the Great Depression. Post-war spending on reconstruction accounted for the boom that lasted into the 1970s. The economy was pretty active during the recent fibre optic and dot.com run-up. When money circulates, goods move and production and employment rise. > You continued: > > ED : "My general point is that, under > conditions of instability, governments will do what they believe they have > to do whether a currency is pegged to a commodity or not. Potentially, > everything is in flux." > > And the first thing they do is divorce their bits of paper from the > commodity. If your piece of paper promises to pay an ounce of gold, that's > what must be delivered. So, divorce is immediate. Sorry, but I prefer a stable, well managed currency to an ounce of gold. My point is that anything can be well managed when social and economic conditions are stable, as they were for a time during the gold standard. However, stability is rarily the prevailing human condition. > You added: > > > >ED :"Nothing ever stands for all time." > > HARRY :Hasn't gold been around - as a measure of value - for umpteen > millennia? I recall that back in the 1970s, the price of gold was about three or four times its current price. > Certainly modern currencies stay around for intervals too short to measure. > (Yesterday's dollar is not the same as today's dollar.) I'm trying very hard to recall what I learned about the gold standard many years ago. What I seem to remember, a little vaguely I must admit, is that it was not so much about maintaining price stability in one country as about fixing the international value of currencies and the settlement of international payments. You could still have inflation and deflation in a given country, and it would seem that the gold standard could be instrumental in this. Under a strict interpretation of the gold standard which, I believe, would have viewed gold as the real currency of a country with paper as its derivative, a country in deficit on its balance of payments would make restitution by shipping out gold, thereby contracting its money supply and deflating prices. When it had a surplus, it would receive gold, thereby increasing its money supply and inflating prices. However, I suppose that under a less strict interpretation a country could still manage its currency and not expand or contract its money supply regardless of how much gold it held, but it would have to redeem money for a fixed amount of gold on demand. I believe that is how the gold exchange standard worked. > Krugman's remark must have been said with tongue firmly planted in cheek. I read it somewhere. It may not have been Krugman. However, under desperate conditions, it would be a way of making people part with their cash. Ed Weick
