There is a lot of talk about hyperinflation versus deflation, but a recent article by Bill Bonner got me thinking. Inflation occurs as people begin to draw down their cash balances and exchange their cash for actual goods, thereby shifting the demand curves for those items. This increases the price of the purchased items until the purchasing power of money reaches its market level and people begin demanding more money. Inflation is essentially a public response to the worthlessness of the value of paper money.

When people begin to do the opposite and begin saving money, the opposite effect happens. The demand curves for certain goods falls while their demand for savings increases. By saving money, one also, in effect, builds up their cash balance. This is because the first thing that a person does is either open or more heavily use their savings account. This de facto increases ones demand for money and therefore raises the purchasing power of money.

As an aside, the paradox of thrift is the belief that a person may lose a job because of you not spending money. The mere fact that you save the money means that it is being spent by someone else, who in exchange pays you interest. Rather than thinking about the money itself, which is in fact useless if not used in exchange, think about the goods that money can command on the market. One dollar worth of coffee is equal to one dollar worth of steel. What is actually happening is that one chooses to have a higher standard of living in the future that at the moment. The market adjusts itself to your choice and supplies you with goods in the future, or steel to make the building which houses a Starbucks in 5 years.

When the public at large is demanding to save more money and the government intervenes by lowering interest rates it is in effect tax. The people should be rewarded for deciding to save resources by debtors, but the government, by printing new money they are stealing the purchasing power before it is spent by the public. Also, by not allowing the interest rate to rise, the Fed has also slowed the process of capital accumulation and thus prolonged the market.

Also the deflationary scenario is important to consider because it also shows how the government is messed up even more than fiscal and monetary policy. By not allowing businesses to fail, they will simply cause them to waste more and more resources while forcing those who the public seems willing to voluntarily associate themselves to pay. TO TURN AWAY FROM THE MARKET IS DEATH. There is no dumber, or no more infuriating path towards destruction. To kill ourselves because of intellectual error. However, unlike death by nuclear war, intervention into the market is slower and less noticeable. However, death is still the result.

In summation:

1) Unless money is used for exchanges, it is a useless item. However you spend it, either to buy food or spend it on a CD, it will be spend and the resources used towards the end you desire.

2) It is important to allow those to succeed to be rewarded and those who fail to be punished. This is the only way to ensure that there is economic growth and human advancement.

3) The market is the result of all humans interacting in this given sphere and social arrangement. Their wishes are of the highest concern because the better I serve the public at large, the better I will do. The extent to which we embrace the market and reject violent intervention, we will be a successful and peaceful society.

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