[notahacker]

> So rates get pegged below the natural rate of interest (which equilibrates supply of savings with demand for productive investment)

But the only body even attempting to determine what "productive investment" is and respond to it is the Fed. Savers are interested in money returns or at least preserving their holding which in many feasible circumstances (chronic instability, zero sum economies with fixed currency supply) is most reliably achieved by not investing in anything productive, not whether their investment makes optimal use of a country's productive capacity. There's nothing more "natural" about production decisions taking the spot price of a commodity the monetary authority has designated as money, or an arbitrary growth rate for money, or how badly undercapitalised wildcat banks are as inputs, and there's nothing about a regime not trying to avoid bubbles or busts that makes it inherently less likely to result in them.

[nostrademons]

But that's not true: every individual household and business is trying to maximize their profits (or at least, those that aren't are replaced by those that are), reducing their expenditures and increasing their revenues. In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs. In the presence of external variations in the cost of capital, it becomes more profitable to capture that external capital than it is to increase efficiency.

Peter Thiel and many other observers have noted that American innovativeness and productivity growth fell off a cliff c. 1971 [1]. He blames government regulation; however, a more likely explanation is that Nixon turned the U.S. dollar into a fully-fiat currency right around then, incentivizing people to compete for newly-created dollars rather than capture more of the ones circulating through the economy.

The causality might run the other way around too, as the Fed holds rates artificially low to paper over low real productivity growth, but this is not an improvement: it just means that we have a feedback loop between money-supply growth, inflation, and low real economic growth.

[1] https://www.seeitmarket.com/wp-content/uploads/2019/01/debt-...

[notahacker]

> In the presence of a stable money supply and stable prices, the only way to do this is through innovation and better efficiency: you reduce the value of your inputs, or you increase the value of the outputs

Or you decide the winning move is not to play, because borrowing is expensive, the purchasing power of your Benjamins won't diminish if you bury them in the ground, and investing money on capital goods in the hope of accumulating more money has negative average risk adjusted returns if there never is any more money in aggregate. On the other hand the way you capture the share of the growing pie is by increasing efficiency, it ceases to be an adequate investment strategy to just hold your capital in uninvested currency.

And taking a graph like that one where the sharp fall in productivity growth starts a couple of decades before leaving the gold standard and actually stops falling afterwards as evidence that leaving the gold standard caused productivity growth slowdown is peak gold bug dodgy graph interpretation! Bretton Woods collapsed because it was inherently unstable anyway.

[nostrademons]

My point is not so much that commodity money is stable as that fiat money is unstable. If you'd taken the opposite side of the debate I'd be happy to tell you everything that was wrong under the gold standard: frequent, severe, recessions; a tendency to hoard cash rather than investing it productively; lack of levers for governments to influence economic outcomes.

However, I posit that all of those downsides are inherently necessary to drive innovation and increase the efficiency of the economy. Bankruptcy and unemployment is how you garbage-collect inefficient ways of doing things: you want people to lose their jobs, because that forces them to take employment in more efficient sectors of the economy. Hoarding is how you a.) amass the capital stocks so that you can deploy them on bold opportunities when they arrive and b.) ensure that people are selective about which opportunities they pursue. If you encourage people to immediately invest any spare cash because the value of that cash goes down, you encourage them to seek out any marginal-productivity activity that might remotely be cash-flow, rather than waiting for big innovative opportunities that might take longer to appear.

In other words, I'm saying that there's no free lunch, a concept that should be familiar to any economist. You need failure to drive success. Mitigate failure and you also eliminate success. And the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed. All social systems eventually collapse; it's just that some people who remember how the previous social system collapsed become blind to how the current system is collapsing, because all they can do is think back to the problems it solved.

[notahacker]

> the opportunity cost of suppressing serious failure for 50 years is stagnation, low productivity, and inflation, exactly what we've observed

But the United States is not the world, and the latter half of the twentieth century is not all of recorded history. The majority of the world grew further and faster over the period of modern money than at any other time in history (yes, there are other important reasons. There are other reasons why US productivity growth is not at its postwar peak too). The majority of recorded history on commodity standards, owners of wealth didn't patiently wait for the most innovative opportunities and direct resources better than the modern world, they hoarded, barely maintained their limited capital stock and much of the speculation that did take place was on capturing neighbours' hard assets rather than generating new wealth streams. US productivity growth in recent years might be below its postwar peak but is way ahead of historic norms, including the initial period of growth and labour saving device invention so unprecedented we call it the Industrial Revolution. Which doesn't mean the current system is ideal, it just means that everybody was worse off before.

[spiralx]

The graph showing a supposed sharp fall in US productivity isn't without its own serious criticism as well:

https://economicsfromthetopdown.com/2020/01/17/debunking-the...

Their argument is what the graph is actually showing is related to the fact that labour's share of US income peaked around 1970 and then began to drop, not some tautologically-defined concept of "production".