Tuesday, January 18, 2011

More on Real Bills at The Daily Bell

The original article can be found at:


@Ingo Bischoff

I thank you again for taking time to further expand on this.

"So we go on and defend our view points in the meantime."

Yes, but more. I think the discussion allows for the proof of that being discussed, it allows for the testing of ideas. It helps in better dissemination of the ideas. The internet, and certainly forums like that DB offers are good avenues to prove by fire the ideas we each hold.

"Without the use of Real Bills to fund production of consumption goods, the savings pool in gold would have to be fifty times larger than with the use of this "social circulating capital".

This statement gets to the heart of my criticism regarding real bills and inflation.

1) Paper (in the form of Real Bills) doesn’t fund the production of consumption goods. Saved consumption goods (previously produced goods, not yet consumed) provide the ability to fund the production of other consumption goods.

2) If there is savings in the form of consumption goods such that it is available to fund the production of further consumption goods, then these will be funded to completion. Real Bills may facilitate the necessary division of labor, but this mechanism isn’t the only one available.

3) If there is not such savings in the form of previously produced consumption goods, the projects cannot be funded to completion. Eventually, the market will realize that the resources are not available to complete the open projects. (The “bust” of the “boom and bust” twins.)

4) In the case the savings exist, there does not need to be 50 times more gold. Prices would be one-fiftieth of what they would have been absent real bills. (No, I am not advocating validity of quantity theory of money, I am speaking directionally.)

5) To claim that some form of “paper” is what is necessary to fund production strikes me as the same theory of central banking today. They are “priming the pump”, trying to “engage the animal spirits”, or whatever. It is a different form of claiming the same thing: using paper to hide the fact that there are not enough resources saved.

6) Hence, inflation. With all of the distortions that such a system brings into the economy. Including the bust that comes when the market concludes that the resources do not exist to complete the open projects.

7) Perhaps the 90 day window limits this damage, but the damage is in any case real. And as assets utilized in the production of consumption goods can alternatively be used for other goods, the damage of inflation will not stay limited or constrained. Distortions will reverberate throughout the market.

Thank you again for the dialogue. While others might have had a vision regarding real bills, it still eludes me as to my objections. Perhaps due to my shortcoming, or perhaps due to the theory. I am satisfied in the fact that the dialogue gets a fair airing, as DB so graciously allows.

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