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With the possible exception of international trade, no topic in economics contains more myths than monetary theory. In the present article I address four popular opinions concerning money that suffer from either ambiguity or outright falsehood.
Article by Robert P. Murphy from Mises.
One: “Money represents a claim on goods and services.”
Although there is a grain of truth in this view, it is quite simplistic and misconceives what money really is.1 Money is not a claim on goods and services, the way a bond is a legal claim to (future) cash payments or the way a stock share is a claim on the net assets of a company. On the contrary, money is a good unto itself. If you own a $20 bill, no one is under any contractual obligation to give you anything for it.2
Now of course, in all likelihood people will be willing to exchange all sorts of things for your $20 bill; that’s why you yourself performed labor (or sold something else) to obtain it in the first place. Nonetheless, if we wish to truly understand money, we must distinguish between credit liabilities on the one hand, and a universally accepted medium of exchange (i.e., money) on the other.
Two: “The purchasing power of money equals the supply of real output divided by the supply of money.”
As with the first view, this one too has a grain of truth. Specifically, if everything else is held equal, then the “price level” (if we ignore the problems with measurement and arbitrariness) will go up if the money supply grows by more than real output, and will go down if real output grows by more than the stock of money.
However, other things need not be equal, in particular the demand to hold money. As with every other good, the “price” of money (i.e., its purchasing power—or how many units of radios, televisions, etc. people offer in order to receive units of money) is determined by the supply of dollars and the community’s demand to hold dollars. A given stock of money can be consistent with any price level you want, so long as you are allowed to change the demand for money.
For example, even if output and the stock of money stayed constant, all prices could double if everyone in the community wanted to cut in half the purchasing power of his or her cash balance. How is this possible? Initially everyone thinks he or she is holding “too much” cash and so tries to spend it. But since the merchants too think they are holding too much, they agree to sell only at higher prices. (If this seems odd to you, consider: Even if you are uncomfortable with $1000 in your wallet—maybe you just won big at the casino—if someone walked up and offers you another $1000 for your shoes, you’d probably accept.)
If we ignore all of the real world complications caused by timing issues, it’s easy to see that in the new equilibrium, where everyone is content with his or her cash holdings, nothing “real” will have changed. Instead, the unit price of everything (in terms of dollars) will have doubled, so that even though the per capita quantity of dollar bills is still the same, now the average person can only buy half as much real stuff with the money in his wallet. Of course this type of example (which I picked up from Milton Friedman) is very unrealistic, but it does serve to illustrate the point that prices are not a mechanical function of physical stocks of goods and dollar bills. On the contrary, people’s subjective valuations are also critical.
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Three: “Under a gold standard the money is backed by something real, whereas under our present system dollar bills are backed up by faith in the government.”
Again, I sympathize with this type of view, but when my upper-level students write such things on their exams, I have to take off points for imprecision. Strictly speaking, under a gold standard the money isn’t backed by anything; the money is the gold. Now if we have a government that issues pieces of paper that are 100% redeemable claims on gold, I wouldn’t classify those derivative assets (i.e. the pieces of paper) as money, but perhaps as money certificates. Yet this is a minor quibble.
My real objection to the view quoted above is that it denies that our current fiat currency is really money. Although (as a libertarian, Austrian economist) I fully condemn the monetary history of the United States, and deplore the means by which the public was forcibly weaned from the gold standard, nonetheless it is simply misleading and inaccurate to deny that the green pieces of paper in our wallets and purses are genuine money. They satisfy the textbook definition: They are a medium of exchange accepted almost universally in a given region. No one is forcing you to accept green pieces of paper when you sell things. (If you don’t want anyone foisting pictures of US presidents on you, then just charge a billion US dollars for everything you sell.) The fact that government coercion (past and present) is necessary to maintain this condition is irrelevant; cigarettes really circulated as money in World War II P.O.W. camps, even though this wouldn’t have occurred without the artificial and coercive environment in which those traders found themselves.
Four: “Deflation is undesirable because it cripples investment. If prices in general are falling, no one will invest in real goods because he can earn a higher return holding cash.”
Although this last myth is understandable when espoused by the layperson, it is inexplicable that some trained economists believe it. (For three examples: An NYU professor used it to “shoot down” my Misesian friend in class, Wikipedia’s entry on deflation mentions this argument, and even Gottfried Haberler advances a version of it in this essay.) For one thing, the argument overlooks the fact that there were many years of actual deflation in industrial economies on gold or silver standards; I don’t think investment fell to zero in every single such year. So clearly something must be wrong with the argument.
Specifically the argument fails because it carelessly assumes that the relevant data for an investor are the spot prices of a particular good from one year to the next. But this is wrong. For example, suppose someone is considering investing in bottles of fermenting grapes that will be ready for sale as wine in exactly one year.3 The rate of return on this investment concerns the 2005 price of the grapes and the 2006 price of wine. So let us further refine the example and suppose that all prices fall 50% every year; i.e., there is massive deflation and presumably no one should be willing to invest in wine or anything else.
Yet there is no reason to jump to this conclusion. For example, the 2005 price of the bottle of fermenting grapes might be $100 and the 2005 price of a wine bottle might be $400, while the 2006 price of the bottle of grapes will be $50 and the 2006 price of a wine bottle will be $200. (Notice that, as stipulated, all prices have fallen by 50% per year.) Would our investor prefer to hold his cash, which in a sense appreciates at a real rate of 100% per year? Not at all! With our numbers, the investor would earn a 100% nominal (not just real) return on his money if he invests in the wine industry: He pays $100 for a bottle of fermenting grapes in 2005, then waits one year and sells the resulting bottle of wine for $200.
Had our investor sat on his $100 in cash in 2005, its purchasing power would have risen from 1/4 of a bottle of wine (in 2005) to 1/2 of a bottle of wine (in 2006). But by investing the cash, his purchasing power goes from 1/4 of a bottle in 2005 to 1 bottle in 2006. Once we allow for the prices of capital goods and raw materials to adjust to expectations of deflation, there is no reason for falling prices to hamper investment whatsoever. 4
Most of the myths concerning money are easily exposed when we consider what money is. Some of the more subtle myths, especially those concerning price deflation, are exposed once we consider the intertemporal price structure. On both counts, the Austrian School of economics serves us well.
[Originally published February 28, 2006, as “What Money Isn’t”]
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‘The Purge’ by Big Tech targets conservatives, including us
Just when we thought the Covid-19 lockdowns were ending and our ability to stay afloat was improving, censorship reared its ugly head.
For the last few months, NOQ Report, Conservative Playbook, and the American Conservative Movement have appealed to our readers for assistance in staying afloat through Covid-19 lockdowns. The downturn in the economy has limited our ability to generate proper ad revenue just as our traffic was skyrocketing. We had our first sustained stretch of three months with over a million visitors in November, December, and January, but February saw a dip.
It wasn’t just the shortened month. We expected that. We also expected the continuation of dropping traffic from “woke” Big Tech companies like Google, Facebook, and Twitter, but it has actually been much worse than anticipated. Our Twitter account was banned. Both of our YouTube accounts were banned. Facebook “fact-checks” everything we post. Spotify canceled us. Medium canceled us. Apple canceled us. Why? Because we believe in the truth prevailing, and that means we will continue to discuss “taboo” topics.
The 2020 presidential election was stolen. You can’t say that on Big Tech platforms without risking cancellation, but we’d rather get cancelled for telling the truth rather than staying around to repeat mainstream media’s lies. They have been covering it up since before the election and they’ve convinced the vast majority of conservative news outlets that they will be harmed if they continue to discuss voter fraud. We refuse to back down. The truth is the truth.
The lies associated with Covid-19 are only slightly more prevalent than the suppression of valid scientific information that runs counter to the prescribed narrative. We should be allowed to ask questions about the vaccines, for example, as there is ample evidence for concern. One does not have to be an “anti-vaxxer” in order to want answers about vaccines that are still considered experimental and that have a track record in a short period of time of having side-effects, including death. One of our stories about the Johnson & Johnson “vaccine” causing blood clots was “fact-checked” and removed one day before the government hit the brakes on it. These questions and news items are not allowed on Big Tech which is just another reason we are getting canceled.
There are more topics that they refuse to allow. In turn, we refuse to stop discussing them. This is why we desperately need your help. The best way NOQ, CP, and ACM readers can help is to donate. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal as well. We are pacing to be short by about $3700 per month in order to maintain operations.
The second way to help is to become a partner. We’ve strongly considered seeking angel investors in the past but because we were paying the bills, it didn’t seem necessary. Now, we’re struggling to pay the bills. We had 5,657,724 sessions on our website from November, 2020, through February, 2021. Our intention is to elevate that to higher levels this year by focusing on a strategy that relies on free speech rather than being beholden to progressive Big Tech companies.
During that four-month stretch, Twitter and Facebook accounted for about 20% of our traffic. We are actively working on operating as if that traffic is zero, replacing it with platforms that operate more freely such as Gab, Parler, and others. While we were never as dependent on Big Tech as most conservative sites, we’d like to be completely free from them. That doesn’t mean we will block them, but we refuse to be beholden to companies that absolutely despise us simply because of our political ideology.
We’re heading in the right direction and we believe we’re ready talk to patriotic investors who want to not only “get in on the action” but more importantly who want to help America hear the truth. Interested investors should contact me directly with the contact button above.
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As the world spirals towards radical progressivism, the need for truthful journalism has never been greater. But in these times, we need as many conservative media voices as possible. Please help keep NOQ Report going.
They’re Trying to Shut Us Down
Over the last several months, I’ve lost count of how many times the powers-that-be have tried to shut us down. They’ve sent hackers at us, forcing us to take extreme measures on web security. They sent attorneys after us, but thankfully we’re not easily intimidated by baseless accusations or threats. They’ve even gone so far as to make physical threats. Those can actually be a bit worrisome but Remington has me covered.
For us to continue to deliver the truth that Americans need to read and hear, we ask you, our amazing audience, for financial assistance. We just launched a GiveSendGo page to help us pay the bills. It’s brand new so don’t be discouraged by the lack of donations there. It’s a funny reality that the fewer the donations that have been made, the less likely people are willing to donate to it. One would think this is counterintuitive, but sometimes people are skeptical because they think that perhaps there’s a reason others haven’t been donating. In our situation, we’re just getting started so please don’t be shy if you have the means to help.
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