Wednesday, February 29, 2012

Should money appreciate or depreciate?

First, an excellent video of Ron Paul vs. Ben Bernanke. Ron Paul illustrates the difference between a silver ounce and fiat money in their respective purchasing powers of gasoline.

Some people may ask: but why should the purchasing power of money grow with time? If you're paid $100 today, why should they buy more stuff in one year from now than today?

First, remember that price of X in terms of Y is determined by abundance of X and Y and demand for them. If, at one point, you have equal amounts of apples and oranges in the society (and demand for them is equal), you should be able to exchange one apple for one orange. If, at another point, the supply of apples doubles (but demand for both products stays the same), you should be able to buy two apples for one orange.

This is why when the amount of money grows faster than the amount of products and services, you can buy less with your $100 as the time goes by.

Now the explanation why it should be the opposite:

The money's value should increase in order to match the increasing amount of products and services that whatever the money was given for produced.

For instance, if you pay you neighbor's daughter — let's say her name is Chaya — to babysit your kids, you free up some of your time to do something productive in the society. As the time passes, the time that Chaya allowed you to free up leads to an exponential increase in products and services available, as a result of your productive labor in those few hours. Therefore, her "share" in the society's products and services (which she can get by cashing in the money you paid her for babysitting) should grow. The longer she waits, the more it should grow.

It's not really different from any other kind of investment. Chaya invests her efforts into society, which leads to increase in products and services. As the time goes, the number of products and services in the society grows as a result of Chaya's efforts. Therefore, the expected reward for Chaya's investment in the society should also grow.

In reality, the opposite happens. The result of Chaya's input into society increases, but her reward decreases with time.

How can this happen?

It happens because the government steals Chaya's money. One way to steal someone's money is to take it from her directly (which the government does, in the form of taxes). Another way — in the case of fiat money — is to print up a lot of money to pay for your own expenses.

See, Chaya did something in order to get her money. She invested effort and time. But the government doesn't do anything. If it wants to pay for some additional governmental expenditures, it just prints up more money, reducing the value of Chaya's savings. As a result, Chaya can buy fewer products and services, while the government gets the difference for free.

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