WHO ARE THE MONETARISTS ? OR THE MEN WHO STARE AT GOATS

 

goats

 

I can usefully examine the analogy of the three men and their goat(s) a little further.

 

One man has twin goats (exactly the same as each other) to sell. The other two men have money; One of the buyers has fifty coins and the other has forty nine.

 

The seller sells the first goat for fifty coins which is the maximum available bid, but he also wants to sell the other goat. However, the second buyer only has forty nine coins, therefore the price will be forty nine coins -that is all it can be although it is exactly the same as the first goat and should by any logic therefore be the same price

What to do?

 

If buyers and sellers allow the price to remain at forty nine coins, then goats have fallen in value despite the fact that the two goats for sale were exactly the same in every way and should be the same price. But more importantly, at a new sale price of 49 coins, 50 coins now equals a goat plus one coin- the seller has made an extra two percent profit from his first sale, just by virtue of owning money!

 

So where did this unearned profit come from?

 

From the value of the first goat. It was worth 50 coins and now it is worth 49 coins- it has lost 2% in value. Every time a goat is sold at a cheaper price the value of ALL goats falls by that amount and that value is transferred from goats to money. And prices will always fall where money supply is restricted.

 

What would the consequences of this be on a larger scale?

 

Imagine a goat seller with ten animals to sell. He decides to do it through an auction. (The animals are all identical by the way- genetic clones!) So he calls ten local farmers together and calls for bids. It so happens that each of the farmers has one more coin than the next so the first has 50, the second 49 the third 48 and so on. Here is a table of the results….

 

eeeeeee

The first column A shows the goats if they were sold at a fixed price of 50 coins.

 

The second column B shows the actual available bids. The first goat went for 50 coins, the second goat went for the second highest available bid (49 coins) an so on..until the price reached 41 coins.

 

The third column C, shows the total individual loss each purchaser suffered at a final price of 41 coins. If you paid 50 coins, at the end of the auction your goat was worth 41 coins and you lost 9 coins in value. If you paid 49 coins, at the end of the auction your goat was with 41 coins and you lost 8 coins in value and so on.

 

If you look at column D you will see that the seller on the other hand made money on each deal. He received fifty coins for the first goat which only turned out to be worth 41 coins so he made an excess of 9 coins and so on…

 

If we look at the row marked ‘Total’ at the bottom of the table we can see the cumulative effects of all this.

 

In column A total we see that if the seller had sold all his goats at a fixed price of 50 coins he would have received a total of 500 coins.

 

In column B total we see that in fact he received a total of 455 coins, an apparent loss of 45 coins.

 

In column C we see that the total losses to the purchasers as a result of the falling price was 45 coins also.

 

But in column D total we see something very odd. We see that the seller actually made a total GAIN of 45 coins as a result of the falling price. When he has sold all his goats he has enough money to buy 11 goats at the latest price and still has 4 coins over!!

 

In fact there has been a transfer of 45 coins in value from the buyers of goats to the seller of goats as a result of the 10 transactions that have taken place. The seller has made approx 11% profit as a result of just ten transactions.

 

Every time a commodity is sold at a progressively cheaper price the value of ALL similar commodities falls by that amount and that value is transferred from commodities to money. And prices will always fall where money supply is restricted.

 

Imagine this on a scale of millions of sellers and purchasers….

 

This is what Monetarism is by definition, a restriction on the supply of money….

 

It seems incredible doesn’t it? Perhaps you are thinking I must be wrong, there would be evidence if this were actually happening on a massive scale.

 

Look at the housing market. All over America there are cash buyers of houses. Cash buyers are propping up the housing market. Just like the goat seller, these buyers have ‘earned’ enough spare cash to buy another house! Just like the goat seller they are cashing in on the unearned increase in value of their cash. Unearned increases in value that are a direct consequence of the monetarist religion of restricting the supply of money.

 

In fact we are fast approaching an asset value IMPLOSION – chaotic deflation on an unprecedented scale.

 

Wages have again recently fallen in Britain and price inflation has fallen as well. It is important that you grasp the significance of this; the prices of commodities are starting to chase wages downwards. This is Black Hole deflation just as destructive as runaway inflation.

 

Is there any way to avoid this Black Hole? Lets go back to our auction. What would happen if we created another 45 coins and distributed them so that every buyer could afford a goat at 50 coins? The buyer would get his asking price of 50 coins per goat. And they are all exactly the same so this must be right. Every buyer would get a goat.

 

But wouldn’t creating this money result in inflation? The money supply would expand by:

 

45/500 or 9%

 

This would equate to a nominal drop in value of the money available to approx 92% of its previous value. Not a real drop in value mind you; you still get your perfectly healthy goat!

But just for the sake of it lets work through the effects.

 

reedtable

 

This table shows a comparison of the amount of money owned before and after the ‘loss’ due to the creation of 45 extra coins. Every owner experiences some loss, but the loss is less, the less you originally owned.

 

bluetable

This table shows the ‘loss’ after it has been adjusted to show the effect of the new 45 coins being distributed among the ten farmers. In all but the case of the richest farmer the ‘loss’ is mitigated by the distribution of the coins. For a majority of the farmers there is a net gain.

greentable

This table shows the actual loss that results from coin creation in comparison to the loss that occurs from deflation and falling prices. In every case the loss from coin creation is less than would occur from deflation. Even the farmer who gains the least from coin creation cuts his losses in half.

 

So everyone is a winner then (or at least not a loser) well, sort of.. the real revelation is in the fortunes of the original seller of goats.

In the deflationary scenario he ended up able to afford another goat with four coins to spare- effectively an 11 % increase. That is all gone under the coin creation scenario. Now he has 500 coins, just as he should have. If he wants to buy a goat the price is 50 coins, same as it is for everyone else. Just as it should be.

Every time a commodity is sold at a progressively cheaper price the value of ALL similar commodities falls by that amount and that value is transferred from commodities to money. And prices will always fall where money supply is restricted.

 Imagine this on a scale of millions of sellers and purchasers….

 

This is what Monetarism is by definition, a restriction on the supply of money….

 

 

 

 

 

 

 

 

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