3. Same thing except the company announces that radar has detected the vast gold deposit, but it will take 2 years to dig down and get it out. Again, prices will plunge right away, almost as much as in case 2. (I hope everyone is still with me, this is just microeconomics 101.)
Scott,I think some of the confusion is due to lack of clarity as to what transactions trigger the hot potato effect. Suppose the central bank buys commercial paper worth 10m ducats. Does that, in your view, inevitably reduce the purchasing-power of the ducat Note that the seller of paper is now more liquid than before, but not any richer. In contrast, the lucky gold prospector really has struck it rich.
But all that is happening with a decreased dollar price of gold is that individuals are placing a lower marginal utility to a unit of gold, because there is more gold. The law of marginal utility is a category of action. A lower marginal utility attached to gold means, ceteris paribus, that gold will trade at a higher ratio to other goods, for example dollars. That is to say: the dollar price of gold falls.
And my contention is that accelerating production of financial claims does tend to cheapen them relative to other financial claims and real goods, but not nearly as predictably, evenly and proportionally as accelerating production of a real good such as gold cheapens it relative to other real goods.
Not idiot, but working at a bank doesnt give one anymore insight if they choose not to look. Its pretty clear that banks are not simple intermediaries that can be assumed out of any macro model of the economy. You really should get outside this monetarist bubble and see what others have discovered. JKH over at Monetary Realism is an excellent source as is Scott Fullwiler (you can google him and find many many banking discussions). The world is not a gold standard world and its not a world where your savings are the source of my loans. A saver can borrow too. Everyone with an income can be a borrower at the same time from a bank (Its hard for those without an income to borrow)
I disagree with both you and Scott here. If we were to go on any type of commodity standard and not keep that commodity in reserve to satisfy the desires of someone who wants to exchange their currency for it, that would be an example of the worst type of bad credibility. Why even go on the standard in the first place You want to have people even more disenchanted than they already are, go on a gold standard but dont promise them any gold for their currency. They can already buy gold at a market price why have a govt controlled gold market which is exactly what you would have under your scenario. 1e1e36bf2d