São Paulo, Brazil
This article demonstrates the need for separation of the price unit from currency units to achieve global economic stabilization. It is a further explanation of a previous article called A global price unit independent from currency units proposed as a solution for the world economy. It explains how balancing of supply and demand depends on sound decision of investment or disinvestment and how economic agents rely on information from the price system to take that decision. It also explains why our present economies mess up with the informative function of the price system preventing markets to achieve balance of supply and demand and consequently economic stabilization. This is a theory that needs further investigation and experimental tests.
Keywords: economics, economic crisis, monetary reform, price theory, price system.
This article states the hypothesis that in order to achieve economic stability it is necessary the use of a price unit independent from currency units, considering the hypothesis that an independent price unit prevents misinformation from the price system, misinformation that misguides decisions of investment or disinvestment.
Economic stability means almost entirely balance of supply and demand. When supply and demand are unbalanced, oversupply leads to unsold products then to debt, and undersupply leads to oversupply of other products due to budget restrictions then to debt. Widespread debt leads to confidence crisis, economic instability and even recession or depression.
In order to balance supply and demand, sound decisions of investment or disinvestment are needed, since decisions of investment or disinvestment enhance or lower output thus balancing supply according to demand.
Sound decision of investment or disinvestment by economic agents is taken based on price variation. Price variation is the key informational factor for economics agents to decide whether and how much to invest or disinvest.
If price variation is not real, which means not due to relative variation of supply or demand, the key informational function of the price system to guide investment or disinvestment decision is lost. This is precisely what occurs in our present economies, leading to unsound decisions of investment or disinvestment in the global economy.
Since the increase and decrease in the circulating monetary amounts (in any form) alter prices, in our present economies, monetary manipulation creates unreal price variation. For example, there is a reduction of the relative real price of a given product when there is more of that product relative to others, following an increase in its supply. Nevertheless, although money is just another product, used to facilitate commerce, an increase in its supply leads to an increase in the prices of other goods.
In order to prevent that effect of monetary manipulation upon prices (unreal price variation), we need to put a variable “price” on money, for that price to alter when money supply varies, instead of the creation of unreal price variation of other goods. If money does not have its own variable price, monetary manipulation will lead to unreal price variation of other goods. (Interest rates does not work as our desired variable price of money, since it concerns only to lending/borrowing and does not apply to the main function of money as a product to facilitate commerce.)
Since putting a variable price on money is impossible if prices are expressed in the same scale as money (currencies) is expressed, we need to separate the scale with which prices are expressed from the currency scales. In other words, we need to have a price unit independent from currency units.
Separation of the price unit from currency units can be accomplished by the creation of an abstract price unit and/or scale to express all prices and by the use of variable conversion rates to relate this independent price unit to any currency unit. An independent price unit can be related to all currencies by variable respective conversion rates, just as prices in one given foreign currency can be related to all other currencies by variable exchange rates.
If currency supply increases or lowers, the market will change the conversion rate for that currency, instead of changing prices of other goods, thus preventing unreal price variation. If there is an increase or lowering in the supply of a given product, the market will change the relative price of that product, thus showing real price variation.
Since the new price system maintains real price variation and prevents unreal price variation, and since price variation is the key informational factor for economics agents to decide whether and how much to invest or disinvest, the economy will have sound decision of investment or disinvestment. With sound decision of investment or disinvestment, output enhances or lowers accordingly to the demand, creating the desired balance of supply and demand. A balanced supply and demand is synonymous of long term economic stability, and our main goal is then accomplished.
To sum up, the creation of an abstract price unit separated from currency units to express all prices and the creation of variable conversion rates to relate that abstract price unit to all currencies are necessary for the global economic stabilization.
Oliveira, F. (2012). A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics, Online(open-access), e05041923. doi:10.7392/OpenScienceRepository.Economics.2012.05041923
Oliveira, Francisco. “A Global Price Unit Separated from Currency Units as a Condition for the World Economic Stabilization.” Open Science Repository Economics Online.open-access (2012): e05041923. Web. 2 Sept. 2012.
Oliveira, Francisco. “A Global Price Unit Separated from Currency Units as a Condition for the World Economic Stabilization.” Open Science Repository Economics Online, no. open-access: e05041923. http://www.open-science-repository.com/a-global-price-unit-separated-from-currency-units-as-condition-for-the-world-economic-stabilization.html.
Oliveira, F., 2012. A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics, Online(open-access), p.e05041923. Available at: http://www.open-science-repository.com/a-global-price-unit-separated-from-currency-units-as-condition-for-the-world-economic-stabilization.html.
1. F. Oliveira, A global price unit separated from currency units as a condition for the world economic stabilization, Open Science Repository Economics Online, e05041923 (2012).
1. Oliveira, F. A global price unit separated from currency units as a condition for the world economic stabilization. Open Science Repository Economics Online, e05041923 (2012).
Research registered in the DOI resolution system as: 10.7392/OpenScienceRepository.Economics.2012.05041923
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