May 2015

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Nice chart. It suggests that from 1860 to 1890 the inflation rate averaged around -2%.

Comparing the gold standard to inflation targeting we can observe the following.

Gold standard delivered:-

1. Stable consumer prices.
2. Stable commodity prices.
3. Stable exchange rates.

Inflation targeting delivers:-

1. Stable consumer prices.
2. Volatile commodity prices.
3. Volatile exchange rates.

The former gave a greater sea of stability and probably would again if we cound convince the relevant parties (eg Fed, ECB, RBNZ, RBA etc) to target the gold price instead of interest rates.

p.s. Good article.

Terje: you touch an interesting topic but I'm not convinced.

Gold in the gold standard was used as money or for redemption at demand for money. I don't think that this is equivalent to gold price targeting.

Actual gold price has no exchange value, it has an industrial/jewelery use value and an inflation hedging investment use value. It has no exchange value from monetary use because there's quite no monetary use of gold nowadays. In the XIX century, monetary excesses would have resulted in gold losses. In a gold price targeting monetary policy setting, it wouldn't.

I believe that if the Central Bank had a commodity price target it would be less inflationary, because commodities are interest-rate sensitive and thus they immediately react to monetary excesses, while consumer pricese react only after the Fisher effect has worked itself out of the price system and ovewhelmed the Wicksell effect.

But this has nothing to do with gold, in my opinion: a copper price targeting or an oil price targeting would do the same (although the price of oil is extremely variable because of political and technical reasons, so it's not suitable for this purpose, but that's another problem).

Good work, mr Saudet; in my opinion all shows the limits of the institutional "designer", instead of institutional design, but I agree with your work.

@Terje: Gold standard directly links the amount of gold to the amount of money, while money pricing all goods. Gold price targeting sets the amount of money so to balance gold demand & supply via gold price; the setting is as unstable as both the former two variables then.
e.g.: fashion shifts from gold to steel, so gold price lowers, then the Central Bank should target gold price, hence buy gold, thus spreading money throughout the economy... thus spreading inflation. This does not look much simile like a gold standard indeed.


I know I am probably being stupid but how does an 'inflation' target deal with changes in relative prices (where some are in the basket and some are not)?

This has always bothered me but seems to be a real issue where fuel and food prices are going up not because of monetary factors but because of demand.

Can we finally be completely honest about fiat money? I mean, we are now to the point where rational (that is to say non-Keynesian) economists can bring themselves to that inflation "is a form of tax". Can we bring ourselves to admit the rest of the truth, that when someone authorized to "borrow money into circulation" from nothing, when they do, it is in effect counterfeiting private wealth?

As we all work to explain and understand inflation, can we now work towards also developing a theory and explaination of a monetary system that does not depend upon deliberate counterfeiting targets of "between +1 and +3%" like we have now at the RBNZ, or the US Fed's "targeted rate of inflation" (sic) of 2%?

The first hurdle of a non-inflationary monetary system will be to educate the public not to confuse (nominal) money with wealth. Maybe it will be too much to ask, but I am not aware of anyone seriously posing the relevant question: why do we put up with this grand fraud?

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Seems you're right about the difficulties of managing inflation when the RB has other responsibilities (such as the foreign exchange rate and ). Allan Bollard talks about the difficulties in the following speech. It's an interesting read. He cautions against the housing boom and warns against the economic fallout of lending to those who cannot repay.

I am new to Austrian thought and am not an economist. I find it very attractive so far.

I'm wondering about the statement you made about the RBNZ being able to completely control price inflation by controlling the monetary base. I thought that one of the problems was that the retail banks create money-from-nothing when loaning money for a home purchase (for instance). I don't think this money is included in the monetary base. Is there a case that the RBNZ cannot control price inflation when the banks have a credit boom?

On a side note, it would be great to hear how folks came to be Austrian and/or Libertarian. In the programming field, for those who like the programming language Lisp, it is common to write a story called "Road to Lisp" or "My road to Lisp". It would be great to see this from Austrians and Libertarians in a "Road to Austrian Economics" or "Road to Liberty". These kinds of stories are wonderful sources of references to books and articles and of common misunderstandings and those "ah-hah" moments when they are swept away.

> foreign exchange rate and...

Sorry, forgot to insert the factors other than CPI that goes into the RBNZ decisions. From the "What is the Policy Targets Agreement?" [1]:

as it implements monetary policy to achieve price stability, the Bank "shall seek to avoid unnecessary instability in output, interest rates and the exchange rate."


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