AgentR11 wrote:Now this *is* a delicate dance, I'll admit; to much "printing" and inflation will start to run unacceptably high; to little, and resource constraints take over driving not only real contraction, but nominal contraction as well. And nominal contraction will destroy the economic system we have in place. Meaning, we starve and die. (I am averse to this outcome, btw)
This is like managed nuclear fission - pull the rodes too far, and the self-enforcing chain reaction arises (hyperinflation), push them too deep, and the reaction subsides and vanishes.
A criticism directed at fiat money is that their volume is pre-destined to rise exponentially. The resources cannot feed the exponential growth because they are limited, therefore a fiat money system is doomed to crash. But unlike the resource supply, the fiat money supply is always under the human control, and the fiat money can always be played with tricks such as devaluations, revaluations, denominations etc. - something totally impossible with resources or commodities. This flexibility is the beauty of the fiat money. In fact, the money supply growth has never been truly exponential indefinitely, first it grows slowly, then fast, then slowly again, then it plateaus, then may go very fast, then crash follows. Usual cycle of boom and bust, lots of examples in history, Wiemar, Latin America, Russia, Zimbabwe.
Post-hyperinflation denominations are usually followed by quick economic growth - Zulus used to be mocked at about the number of zeros on their banknotes and now they are rumored to be one of the fastest growing world's economies. So the exponential boom and bust nature of the fiat money does not seem to be a kind of fundamental flaw - unlike the resource supply, money supply is manageable in any imaginable way. How you can deal with the boom and bust and at the same time preserve the world reserve status of your currency is a totally different story, but being a reserve currency issuer is not a pre-requisite for the general well-being of a nation.
The advocates of the golden standard often point out that the fiat money don't have intrinsic value. One way to look at fiat money is to consider them not
as a storage of wealth or economic value, but rather as a tripartite legal contract involving the buyer, the seller, and the state. The buyer's and the seller's roles are self-explanatory, while the state is there to ensure that the buyer and the seller abide by the rules that a banknote (legal contract) carries with it. These rules are designed to fit and feed the current snapshot of the social structure of the society - whether middle class dominant, or 1% or oligarchy or whatever. In this case an intrinsic value of the money would actually be a disadvantage as it distorts its actual contractual value. As long as this intrinsic value is negligibly low, it can be ignored. Otherwise it has to be acted upon. Canada recently stopped producing small coins, and Russia did the same shortly before as their cost exceeded their denomination value. Money expressed as computer bits and bytes appear to be ideal as they have no intrinsic value at all.
Another criticism directed at fiat money is that the amount of the debt in the system is always greater than the amount of the money there. But thinking in the terms of money as contractual obligations and means of the societal structure preservation, this is actually a must-have attribute rather than a disadvantage. The underlying assumption is that the people are motivated by greed (surplus accumulation bias) and fear (deficit aversion). Where the amount of money is equal or greater than the amount of debt, there will always be political pressure to redistribute the money in such way that no debt goes uncovered. But then the people will not fear lack of money, will lose the fear motivation and will stop working - another angle of hyperinflation, abundance of money in the absence of products.
In order for the fear to be effective motivator, the system needs to ensure a continuous outflow of lazy or unlucky dropouts at the fringes - hopefully caught by the social safety net and brought back to normal after a while, - but keeping the rest in the fear of losing their status. The interest rate driven fiat system ensures this via the inevitability of the excess of debt over money regardless of the political interests involved. The critics say that it has to lead to exponential growth in money supply - no, it doesn't: let the people go bankrupt and cancel the debt. Even if it does go exponential, do a denomination at some point and you are again at the starting point - something that is impossible with the commodity-based money like golden.