In the previous posting on this subject, we looked at a possible solution to the problem of implementing a monetary standard when the commodity chosen as the standard has different prices in different regions. We proposed that it should be feasible to use the highest price of a Kilowatt hour in the economy, which would have no adverse effect if (and only if) the Economic Democracy Act has been implemented, and all consumers of electricity own the electricity producer(s) in direct proportion to their usage.
We also looked at what would happen if the value of the standard changes when the price remains fixed. We discovered that there is an inverse relationship between the change in the value of a standard and the price level in that case.
The following charts may be useful in illustrating this. Of course, we take the usual economic assumption for analysis, ceteris paribus (all [other] things being equal), which is unrealistic, since values in the free market and thus prices are changing all the time, but we’re isolating and analyzing a hypothetical effect, not an actual case.
It is important to keep in mind that this is a pure analysis and only looks at what happens if the value of the standard changes but everything (and we mean everything) else stays the same, except for the effect that the change we’re analyzing has on other things. Also keep in mind that because we’re using the Kilowatt hour as a standard, the value is highly unlikely to change, so this is to all intents and purposes a purely hypothetical situation. In real life, prices will get lower as production becomes more efficient and the bizarre Keynesian idea that there must be production that is not for consumption is relegated to the dustbin of economic history.
Another important thing to keep in mind is that unlike what happens when we set a fixed price for a standard that differs from the actual price of what we’re using as a standard and people take a financial loss, a change in the value of an existing standard does not cause an immediate loss or gain but is implemented gradually as the effect filters through the economy. In general, only monetary savings and cash on hand are affected, and then only over time, not all at once.
The first case we’ll look at is where the value of the Kwhr decreases by 10%. Keep in mind — and we’re going to keep stressing this — that all these scenarios are highly unlikely and in real life can probably be regarded as purely hypothetical. One of the reasons the Kwhr should make a good monetary standard is that the value remains constant for long periods of time and should not change in the way we’re looking at today:
|
VALUE OF KWHR DECREASES BY 10% WHEN $1 = 10 KWHRS |
||||||
|
|
OLD PRICE IN |
FIXED PRICE OF |
OLD PRICE IN |
CHANGE IN |
NEW PRICE IN |
NEW PRICE IN |
|
PRODUCT |
DOLLARS |
KWHRS |
KWHRS |
KWHR VALUE |
KWHRS |
DOLLARS |
|
A |
$ 0.25 |
$ 0.10 |
2.50 |
-10% |
2.75 |
$ 0.28 |
|
B |
$ 2.00 |
$ 0.10 |
20.00 |
-10% |
22.00 |
$ 2.20 |
|
C |
$ 3.75 |
$ 0.10 |
37.50 |
-10% |
41.25 |
$ 4.13 |
|
D |
$ 5.50 |
$ 0.10 |
55.00 |
-10% |
60.50 |
$ 6.05 |
|
E |
$ 7.25 |
$ 0.10 |
72.50 |
-10% |
79.75 |
$ 7.98 |
|
F |
$ 9.00 |
$ 0.10 |
90.00 |
-10% |
99.00 |
$ 9.90 |
|
G |
$ 10.75 |
$ 0.10 |
107.50 |
-10% |
118.25 |
$ 11.83 |
|
H |
$ 12.50 |
$ 0.10 |
125.00 |
-10% |
137.50 |
$ 13.75 |
|
I |
$ 14.25 |
$ 0.10 |
142.50 |
-10% |
156.75 |
$ 15.68 |
The important thing to take away from the above chart is the realization that as the value of the standard falls and the price of the standard remains fixed, the price level rises. This is because as the standard becomes worth less than before, buyers must give more of something measured in terms of the standard to get the same value as before.
Again, this is highly unlikely when using the Kwhr as the monetary standard, but it’s what would happen if the value of the standard went down. There is an “inverse relationship” between the value of the monetary standard and the price level when the price of the standard is fixed. We see this in the — again unlikely — event that the value of the standard rises, and the price of the standard remains fixed:
|
VALUE OF KWHR INCREASES BY 10% WHEN $1 = 10 KWHRS |
||||||
|
|
OLD PRICE IN |
FIXED PRICE OF |
OLD PRICE IN |
CHANGE IN |
NEW PRICE IN |
NEW PRICE IN |
|
PRODUCT |
DOLLARS |
KWHRS |
KWHRS |
KWHR VALUE |
KWHRS |
DOLLARS |
|
A |
$ 0.25 |
$ 0.10 |
2.50 |
10% |
2.25 |
$ 0.23 |
|
B |
$ 2.00 |
$ 0.10 |
20.00 |
10% |
18.00 |
$ 1.80 |
|
C |
$ 3.75 |
$ 0.10 |
37.50 |
10% |
33.75 |
$ 3.38 |
|
D |
$ 5.50 |
$ 0.10 |
55.00 |
10% |
49.50 |
$ 4.95 |
|
E |
$ 7.25 |
$ 0.10 |
72.50 |
10% |
65.25 |
$ 6.53 |
|
F |
$ 9.00 |
$ 0.10 |
90.00 |
10% |
81.00 |
$ 8.10 |
|
G |
$ 10.75 |
$ 0.10 |
107.50 |
10% |
96.75 |
$ 9.68 |
|
H |
$ 12.50 |
$ 0.10 |
125.00 |
10% |
112.50 |
$ 11.25 |
|
I |
$ 14.25 |
$ 0.10 |
142.50 |
10% |
128.25 |
$ 12.83 |
Here we see the same thing we noted in the first chart: that there is an inverse relationship between a change in the value of the standard and the price level when the price of the standard remains fixed. Other than that, we will stress that 1) this is unlikely to happen since the value of the Kwhr is unlikely to change, and 2) even if it does change, the effect will be felt gradually over time, not all at once.
To emphasize these two key points — the inverse relationship and the gradual nature of any such change — let’s exaggerate the change in the decrease and increase in the value of the standard when the price of the standard remains fixed.
|
VALUE OF KWHR DECREASES BY 50% WHEN $1 = 10 KWHRS |
||||||
|
|
OLD PRICE IN |
FIXED PRICE OF |
OLD PRICE IN |
CHANGE IN |
NEW PRICE IN |
NEW PRICE IN |
|
PRODUCT |
DOLLARS |
KWHRS |
KWHRS |
KWHR VALUE |
KWHRS |
DOLLARS |
|
A |
$ 0.25 |
$ 0.10 |
2.50 |
-50% |
3.75 |
$ 0.38 |
|
B |
$ 2.00 |
$ 0.10 |
20.00 |
-50% |
30.00 |
$ 3.00 |
|
C |
$ 3.75 |
$ 0.10 |
37.50 |
-50% |
56.25 |
$ 5.63 |
|
D |
$ 5.50 |
$ 0.10 |
55.00 |
-50% |
82.50 |
$ 8.25 |
|
E |
$ 7.25 |
$ 0.10 |
72.50 |
-50% |
108.75 |
$ 10.88 |
|
F |
$ 9.00 |
$ 0.10 |
90.00 |
-50% |
135.00 |
$ 13.50 |
|
G |
$ 10.75 |
$ 0.10 |
107.50 |
-50% |
161.25 |
$ 16.13 |
|
H |
$ 12.50 |
$ 0.10 |
125.00 |
-50% |
187.50 |
$ 18.75 |
|
I |
$ 14.25 |
$ 0.10 |
142.50 |
-50% |
213.75 |
$ 21.38 |
Nothing new here, just an affirmation of what we saw before.
|
VALUE OF KWHR INCREASES BY 50% WHEN $1 = 10 KWHRS |
||||||
|
|
OLD PRICE IN |
FIXED PRICE OF |
OLD PRICE IN |
CHANGE IN |
NEW PRICE IN |
NEW PRICE IN |
|
PRODUCT |
DOLLARS |
KWHRS |
KWHRS |
KWHR VALUE |
KWHRS |
DOLLARS |
|
A |
$ 0.25 |
$ 0.10 |
2.50 |
50% |
1.25 |
$ 0.13 |
|
B |
$ 2.00 |
$ 0.10 |
20.00 |
50% |
10.00 |
$ 1.00 |
|
C |
$ 3.75 |
$ 0.10 |
37.50 |
50% |
18.75 |
$ 1.88 |
|
D |
$ 5.50 |
$ 0.10 |
55.00 |
50% |
27.50 |
$ 2.75 |
|
E |
$ 7.25 |
$ 0.10 |
72.50 |
50% |
36.25 |
$ 3.63 |
|
F |
$ 9.00 |
$ 0.10 |
90.00 |
50% |
45.00 |
$ 4.50 |
|
G |
$ 10.75 |
$ 0.10 |
107.50 |
50% |
53.75 |
$ 5.38 |
|
H |
$ 12.50 |
$ 0.10 |
125.00 |
50% |
62.50 |
$ 6.25 |
|
I |
$ 14.25 |
$ 0.10 |
142.50 |
50% |
71.25 |
$ 7.13 |
Nothing new here, either. It is simply more obvious that there is an inverse relationship between the value of the standard and the price level when the price of the standard is fixed.
In conclusion, we want to stress that these are almost purely hypothetical situations to being with since the value of the Kwhr is highly unlikely to change. In the real world, what is going to happen is that the price level is going to fall gradually as production becomes more efficient, not because the value of the Kwhr rises.
The value of the Kwhr may, in fact, fall as production of electricity becomes more efficient, but the price level will still probably remain stable or fall because the efficiencies in the economy as a whole will offset the increased efficiency of producing electricity.
Another thing we have to stress is that this issue will not even be relevant until the existing reserve currency is 100% asset backed and it becomes feasible to implement a fixed standard, and this can take decades, especially given the gargantuan level of government debt that exists today.
#30#