Sunday, November 22, 2015

Ben Carson, the National Debt, and Interest Rates

I am not sure why I find this so irritating, but...

A reporter, Chris Mathews, argues that presidential candidate Ben Carson doesn't understand some basic economic concepts.

And then Mathews goes on to suggest that he has a pretty weak grasp of those same concepts.

A reporter, Ryssdal, tried to ask Carson about his view regarding increasing the debt ceiling and default.   From Carson's answers, it does appear that he has no clear understanding of the issue.   First, Carson states that he is opposed to an "increased budget."   I think that would be opposed to an increase in government spending.

When asked again about the debt limit, he states that that he opposes increasing spending limits.  That fits in with the interpretation above.

And then he is asked a third time and says that he thinks we need to "restructure the way we create debt."

Mathews then explains his understanding that Congress must both approve spending and borrowing.  He seems to think that if Congress approves spending and then fails to approve borrowing, then it defaults.

Well, I guess that something like that is the Obama Administration's position.  But Mathews doesn't appear to be aware of peculiar nature of the argument.

If the debt limit is not increased, then new debt can still be issued to pay off the principal of old debt as it comes due.   The debt limit is a limit on total borrowing.   Since spending can be financed by taxes as well as borrowing (and most Federal government spending is in fact funded by taxes,) there is no necessary connection between approving spending and approving borrowing.

To avoid default,  it is necessary to do more than to borrow new money to pay off government bonds as they come due.  Interest must be paid on the debt as well.   Interest expense is a current expenditure.  Fortunately, the U.S. government collects more than enough tax revenue each year to pay all of the interest due on the existing national debt.

The Federal governments receipts are over $3.2 trillion per year and the interest expense is about $200 billion.  The government could pay the interest due on the national debt each year and still spend $3 trillion on other things without any additional borrowing. The total amount the government owes could remain about $18 trillion.

While the government collects substantially more tax revenue than it owes in interest on the national debt, Congress has approved substantially more expenditures than tax revenues.    The government is spending close to $3.7 trillion each year.   In other words, the current budget includes a deficit which is supposed to be funded by borrowing.     The budget deficit is over $400 billion.    But cutting spending enough to balance the budget, the government would collect about $3.3 trillion per year.   To avoid default on the $18 trillion it already owes, it must pay $200 billion of that in interest.   And this leaves a little more than $3 trillion to spend on everything else.

The Treasury Department says that it does not have the administrative capability of doing anything other than spend money already approved by Congress.  This mixes in a variety of current expenditures with interest payments and principal payments as they come due.   It is able to borrow enough money to cover all the expenditures beyond the tax revenue which comes in from time to time.   If the Treasury Department hits the debt limit, it will run out of money and won't be able to make payments.  Some of those payments might be for interest and principle on the national debt, and so there will be a default.

Another argument, which Mathews seems to be making, would be that there is nothing special about making payments on the national debt.   If Congress has approved an expenditure, then failing to make that payment is a default whether it is a debt or not.   While this is not an entirely unreasonable use of the term "default," the consequences of such a default are not nearly as bad.   I don't think any organization other than the U.S. Federal government could, much less would, take this approach.    Most obviously, if revenues come in less than expected, just about every organization can and will curtail planned expenditures.   If the Finance department says they are unable to pay debt service and avoid default unless they are provided enough money to pay every planned expenditure, then it is time to find fire them and get someone competent in charge.

Of course, the reality is that President Obama and the Democrats would probably prefer to default on the national debt rather than fail to pay out money to favored Democrat groups.   (And I bet there are plenty of Republicans who prioritize defense spending and even tax relief over avoiding default.)   But more importantly, threatening to fail to make principal and interest payment when due and threatening to blame this fiscal irresponsibility on the Republican Congress is a plausible threat to compel the Republicans to vote to increase the debt limit.  

Anyway, it is true that Carson didn't make it obvious that he was aware of these issues, though his last answer might be consistent with a good understanding--we need to restructure the way we issue debt.

Mathews' last statement on the matter, that Carson could have replied that when he is President he will balance the budget and increase the debt limit at the same time, really does suggest that Mathews is confused.   If the budget were balanced, the debt limit would not need to be increased.    Government would need to spend no more than close to $3 trillion per year.

Mathews points out correctly that Carson's proposal for a low flat tax has not been matched by proposals to cut government spending enough to maintain a balanced budget.   A 3 to 4 percent cut across the board wouldn't balance the current budget even without tax cuts.  It is more than 12%.

If the growth of government spending is held to less than the growth rate of the economy, then even with modest tax cuts, it would be possible to bring the government's budget into balance eventually.   But this would take time and there would be budget deficits and an increasing national debt in the meantime.   Cutting taxes and immediately balancing the budget requires very steep cuts in government spending.

Mathews also comments on Carson's view on interest rates and debt.  Mathews claims that there is no relationship.   That is not obviously true.   There are a variety of mechanisms through which a higher deficit (which increase the national debt over time,) would lead to higher interest rates.   Alternatively, a higher debt would lead to higher interest rates as well, though care should be taken not to double-count.  Perhaps these supposed mechanisms do not really occur, but Mathews seems to be unaware of them.

Of course, Carson's view is backwards.  He seems to think that a higher national debt is associated with lower interest rates and these lower interest rates are bad because they make it more difficult for savers to accumulate wealth.    Carson seems to think that a higher national debt causes the economy to be weak and the Fed responds by lowering interest rates.

I hardly would like to see Carson advocate that the government borrow a lot of money so that lenders will earn higher interest, but it would be nice if Mathews and Carson understood basic supply and demand.

I wasn't planning to support Carson anyway.   However, the damage done by bad economic reporting is probably worse than that done by economically illiterate Presidential candidates.


Monday, October 19, 2015

David Beckworth makes a great point here.

Of course, it remains true that the Fed is "fixing" interest rates, though not through a conventional price control.   Rand Paul is correct the Fed should stop doing this and let all interest rates be controlled by market forces.

But as David points out, the market clearing interest rate is almost certainly very low right now because of "low spending," or alternative, high saving and low investment.   

And worse is the notion that the Fed should manipulate interest rates to "normalize" them, that is to fix them at a level from the past.   The job of prices is to coordinate, not be at some traditional level.   It is the notion that there is something to "normalize" about any price, including an interest rate, that is the fallacy of price fixing.

Of course, some free marketers have in the back of their mind some notion that the quantity of money should remain fixed, and so present or even past increases in the quantity of money imply that interest rates are below the appropriate level.   

It is only when one considers both the quantity of money and the demand to hold it, and then dig deeper into the concept of the nominal anchor of the economy, that any notion any change in the quantity of money is distortionary is shown to be empty.

Saturday, August 22, 2015

Monetary Policy and Bicycles

Nick Rowe does a great job with mechanical analogies for monetary policy.

Scott Sumner mentions Rowe and New Keynesian and Neo-Fisherism and then links to a video about someone who put tremendous energy into learning to ride a bike with reversed steering.   Scott found it linked by Tyler Cowen here.   Here is  link to the video.

I can't begin to link all the relevant posts by Rowe.   The video really relates to many posts about how the conventional wisdom today for central banks is that they need to lower nominal interest rates to raise inflation and raise nominal interest rates to raise inflation.   Monetary policy in new Keynesian models has traditionally followed that conventional wisdom exclusively.

With neo-Fisherism, a higher nominal interest rate is associated with higher inflation and a lower nominal interest rate is associated with lower inflation.   Therefore, couldn't it be that when central banks raise their interest rate target, they cause higher inflation?   Could it be that the low interest rate targets set by the Fed for the last 7 years is why inflation continues to run below the Fed's target of 2%?

The video is about a bicycle constructed to go left when the ride turns right and right when the rider turns left.   It is about how difficult it was for him to learn to ride the new bike.

Rowe has argued that the conventional view that the way to raise inflation is to first lower the nominal interest rate seems convoluted.   This is especially true when the higher inflation will later require the central bank to raise its target for the nominal interest rate.  

Those, like Rowe (and I) who have never accepted the new Keynesian approach would point out that a more rapid growth rate of the quantity of money may well result in a lower nominal interest rate in the short run, but that the long run effect is a higher inflation rate and a higher nominal interest rate.   If the short run "liqudity effect" on the interest rate were to not materialize, say because of anticipation of inflation or rapid growth in real output, it would not be of central importance.   A possible, transitional effect does not appear.  So what?   Josh Henderson has a good post along those lines.   The "problem" with neo-Fisherist results in a new Keynesian model is a reason to believe that the new Keynesian approach to modeling is problematic.   If the Fed expands money growth, even if this does lead to a temporary decrease nominal interest rates, it won't result in lower inflation.    And if the more rapid money grown results in immediately higher nominal interest rates, that won't result in lower inflation either.  

But perhaps most relevant is Rowe's post about how it is all about communication.   If the Fed raises interest rates and everyone thinks this means the Fed is trying to stop inflation, then inflation will fall.  But if the Fed raises interest rates and everyone thinks this is due to a new inflationary policy, inflation will rise.

And even more relevant to the bicycle experiment is David Glasner's post about central bankers having a couple of centuries of gold standard experience to narrow their perspective--that is, they learned to ride a "normal" bike.   In that world, they were trying to keep their own liabilities redeemable in gold.   Raise interest rates to attract more gold.   Lower interest rates (if you want) because you would rather hold earning assets rather than gold.   The price level and inflation rate depended on the world supply and demand for gold.  

And after the gold standard disappeared, we are now suffering through the efforts of our central bankers to ride a new type of bicycle--one that determines the value of money.  

My solution is to constrain central banks so that they are no longer responsible for determining the value of money.    A nominal GDP level target determines the price level.   A central bank (or a free banking system) subject to an nominal GDP level rule would no more be in a position to use the neo-Fisherist approach than a central bank (or free banking system) subject to gold redeemability.   The inflation rate necessary to return to target is tied down, so if the rule is credible, so is the expected inflation rate.      

Monday, August 3, 2015

NBER Working Paper on the Desirability of NGDP targeting.

On the Desirability of Nominal GDP Targeting

Julio GarĂ­nRobert LesterEric Sims

NBER Working Paper No. 21420
Issued in July 2015
NBER Program(s):   EFG   ME 
This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.

Wednesday, May 27, 2015

Asset Price Inflation

Larry White mentioned that Alchain and Klein showed long ago that the measure of the purchasing power of money should include asset prices.

I don't agree.

I strongly agree that it is a mistake to measure the purchasing power of money solely by the prices of consumer goods and services--the CPI or CEP.

But I don't think that the prices of financial assets should be included in a measure of inflation.

As for real assets, I think that only the newly-produced ones should count.

In other words, I think that the GDP deflator, or something like it, is the least bad approach to measuring the purchasing power of money.

First, consider equities.   If we assume that a share of stock is a claim to a fixed quantity of goods, then any increase in the price of a share would imply a lower purchasing power of money.   However, suppose that a company is expected to become twice as profitable.   The price of  a share would rise, but it would not be a higher price for the same quantity of future goods.   It would be a higher price for a higher quantity of future goods.

Now, suppose the market interest rate should fall, and the lower discount of future returns results in higher prices of equities and existing long term bonds.   Superficially, the purchasing power of money is less.   It is necessary to pay more for the same quantity of future goods.

However, suppose we lived in a world where the only saving instrument was a saving account.   There is no possibility of capital gain or loss on financial assets.   If the interest rate should fall, then it ia true that money put into a saving account will provide less future consumption.   But is that a lower purchasing power of money?   Saving or accumulated wealth now generates a lower nominal and real income.    Is that a higher price level?    I don't think so.

I guess my thinking on the subject is very much influenced by some sort of presumption that  inflation is bad and the monetary regime should be stabilizing the purchasing power of money.   And so, I would ask if a monetary contraction would desirable to force down the prices of consumer goods and services enough to offset the increase in long term bond prices.   I don't think so.

The coordinating role of the lower interest rate is to raise the demand for both  consumer goods and services and capital goods.

For example, suppose there was an increase in saving supply.   The direct and immediate effect is a lower demand for consumer goods and services.   The coordinating role of the lower interest rate is to increase the quantity of consumer goods and services demanded as well as the quantity of capital goods demanded.    The result is what returns saving and investment back into balance.

I certainly grant that it would be inappropriate for this reallocation of resources to occur with stable prices for consumer goods and services.   Lower prices of consumer goods and services along with higher prices of capital goods should be expected.  

Now, the lower interest rates should result in higher prices of all the existing capital goods--not just the newly produced ones.   This doesn't require anyone to spend any money on all of these capital goods.   It is just that entrepreneurs will be willing to offer more money for them and those using them now will insist on a higher payment to part with them.

Should the weighting of capital goods in the price level depend on all of the capital goods or just the newly produced ones?

Suppose consumption is $8000 billion and investment $2000 billion.   The capital stock, however, is $20,000 billion.    There is an increase in saving and a $200 billion shift in demand.    Suppose that this 2.5% decrease in demand for consumer goods results in 1% lower prices.   However, the 10% increase in the demand for capital goods requires 4% higher prices.    If we look at only currently produced goods, the price level remains the same.    But if all of the existing capital goods count, then there has been a very substantial inflation--about 2.5%.

Would it be better for the prices of  consumer goods to fall more and the increase in the prices of capital goods to rise less?    What would this be signalling?   That the production of consumer goods and services should be reduced by more?   That the expansion in the production of new capital goods should be less?

Presumably this would require that wages be reduced to return to equilibrium.   Why?   Is this signalling that people should work less?

In my view counting stock prices is more or less the same thing as counting the prices of existing capital goods--in theory.

In reality, is it really the best that if stock prices go up,  there is a deflation of consumer prices along with money wage cuts?   What is the point?   Do we need to get people to work less?   Or is it just to free up resources from the production of consumer goods and services to print up more shares of stock?

As for bonds--as old bonds mature and new ones are issued at par with lower coupon rates, does that count as deflation?    The "prices" of bonds are falling.   Should consumer prices and money wages rise to offset that deflation?   Clearly they should not.

Now, perhaps Alchain, Klein, and White have no presumption that the purchasing power of money should be stabilized.   If more saving supply or reduced investment demand results in a  lower natural interest rate, then that just lowers the purchasing power of money--and there is nothing bad about it.   Maybe.

And I must admit, I don't favor a stable price level of any sort, but rather a stable growth path for spending on currently produced output.   However, I do favor a growth rate of spending that is consistent with the expected trend growth rate of potential output.   And so, this would tend to result in a stable price level for currently produced output.  (And I know White does not favor stabilizing the price level, especially when there are changes in productivity.)

But it wouldn't tend to stabilize the prices of current output and existing capital goods and financial assets all together.

And it shouldn't.   Or at least, I don't think so.

Saturday, March 21, 2015

Are Open Market Operations Distortionary?

Many of my fellow free bankers agree that when banks accommodate changes in the demand to hold their monetary liabilities, the result is equilibrating and nondistortionary.   However, they believe that when a central bank adjusts the quantity of base money to accommodate changes in the demand for it, there is something problematic with the process.   The injection of base money is somehow distortionary.

Now, I don't want to claim that this could never be a problem.   The Fed's policy since 2008 has most certainly become very distortionary--intentionally   Perhaps there should be no surprise that the Fed has attempted to funnel money into housing.    Using government interventions of one sort or another to promote home ownership has been the norm for  nearly a century now.

Still, let us suppose that the government has a national debt because of past wars but that it now balances its budget.    The central bank always adjusts the quantity of money by buying and selling existing government bonds.  

If some household chooses to save by spending less on consumer goods and instead purchasing government bonds, then the result is a higher price of bonds and a lower yield.   The increase in price and decrease in yield has to be sufficient to persuade someone to reduce their holdings of the government bonds.   The most likely result is that those least attached to holding government bonds purchase some other sort of financial asset.   That results in higher prices and lower yields on those assets.   The final result is a decrease in the amount saved and increase in the amount invested.   This is an expansion in spending on consumer goods that only partly offsets the initial decrease and an expansion in spending on capital goods.  

An increase in supply creates a surplus at the initial price, but as the price decreases, quantity supplied decreases and quantity demanded increases returning to an equilibrium where quantity supplied and demanded are equal.   The price is lower and the quantity is higher.   Apply econ 101 to saving supply and investment demand.

While the existence of this national debt requires that interest be paid and so taxes collected, I find it difficult to see how the individual saver who purchases these bonds has created some kind of distortion.   While the result is unlikely to be exactly the same as it would have been if that household had saved by purchasing some private security--stock or bond--we can hardly expect that such purchases would have directly funneled resources into the firms that issued those particular securities.   The process of coordinating saving and investment occurs through adjustments in financial asset portfolios and interest rate signals that result in an appropriate decrease in the quantity of saving supplied and increase in quantity of investment demanded.

Now, suppose that instead of purchasing government bonds, the household that initially saved accumulated central bank issued hand-to-hand currency.   Income was earned and not spent on anything.   Paper notes are stuffed into a safe-deposit box.     Further suppose the central bank makes a standard open market purchase.   It creates new money out of thin air and purchases government bonds--just accommodating the increase in the demand to hold money.

The result after that point is exactly the same as what would have happened if the household had directly purchased the government bonds.   As explained above, this results in appropriate adjustments in the price and yield on those government bonds and on other financial assets such that the amount saved and invested adjust to coordinate the increase in saving.    Further, there is no significant difference as far as the adjustment to this additional saving than would have occurred if the household had purchased privately-issued stocks or bonds.

Given the dominant Keynesian (old or new) framing, a central bank that accommodates an increase in the demand to hold base money by expanding the nominal quantity issued through open market purchases of government bonds would be described as lowering the interest rate to stimulate consumption and investment spending.   The market coordination process to an increase in the supply of saving leading to lower interest rates and so a readjustment in the quantity of saving supplied and increase in the quantity of investment demanded is twisted into some kind of intervention by the Fed -- pushing interest rates too low in order to unnaturally stimulate spending.   That is an inappropriate framing.

Now, I will surely grant that the potential for a central bank to create an excess supply of money is much greater than that of private banks issuing any sort of money, and especially money redeemable in some other form of money currently being used.   My point is simply that to the degree a central bank limits its issue of new money to the amount demanded, there is nothing especially distorting about the process.   It is coordinating.   The proper comparison is not what would happen if the nominal quantity of money remained fixed and there was a deflation of prices and wages.  Nor is the proper comparison to what would have happened if there had never been an increase in the supply of saving.  The proper comparison is what would happen if there was a increase in the supply of saving by purchasing government bonds.

With an ordinary fractional reserve banking system, an increase in the demand to hold bank deposits is directly an increase in desired lending to a bank but indirectly funding for whatever projects the bank finds profitable.   That is the nature of the contract between bank and depositor and the logic of financial intermediation.    Similarly, an increase in the demand for base money under a monetary regime where the central bank makes ordinary open market purchases is directly a loan to the central bank, but indirectly a loan to the government.   If the government is balancing its budget, then the effect is simply a coordinating expansion in other sorts of private spending.    At least, as long as the central bank limits its issue of money to amounts that people choose to hold.

Friday, March 20, 2015

Salerno on Market Monetarism

Tom Woods and Joe Salerno explain what is wrong with Market Monetarism.

The most glaring error is Salerno's claim that any increase in the quantity of money pushes the market rate below the natural rate of interest  because the new money is injected into credit markets.   However, an increase in the quantity of money that matches an increase in the demand to hold money rather keeps the market interest rate equal to the natural interest rate.   If saving occurs by accumulation of money balances, then the natural and market interest rates decrease.   If instead, the added money balances are accumulated by reducing spending on capital goods or other financial assets or even selling capital goods or other financial assets, then the natural and market interest rates remain unchanged if newly created money is injected into credit markets.

The oddest portion of his argument is the admission that prices and wages are sticky but that this is OK because entrepreneurs can choose to adjust them if they want.   There was a rather odd notion that these are small little blips.   Well, I suppose some of them are minor and don't make much difference.  It is when a large change in the demand to hold money leads to a large change in market clearing prices that sticky prices and wages result in large changes in output and employment which are serious problems.

Also, the entire discussion carries on ignoring a decrease in the demand to hold money.  Market monetarists favor a decrease in the quantity of money in that circumstance.   The Salerno view is that the inflation (or reflation) of prices is harmless?   Entrepreneurs just need to take care of it?

Anyway, the key question is what sort of monetary regime is best.  Is it better to have a monetary regime that requires changes in the price and wage level so that real money balances adjust to the demand to hold them given a fixed nominal quantity of money, or is it better to have a nominal quantity of money that adjusts with changes in the demand to hold money.    While price and wage adjustments are still necessary to coordinate economic activity, they aren't necessary to provide for monetary equilibrium if the nominal quantity of money adjusts to changes in the demand to hold money.

Salerno also suggests that entrepreneurs should not be treated as fragile flowers unable to maintain monetary equilibrium.   "Unable" shows an unfortunate tendency of some Austrians to confuse sticky with stuck prices, and really, to continue to fight past battles regarding long run unemployment equilibrium rather than what is really at issue--whether sticky prices and wages result in temporary fluctuations in output and employment that are both painful and avoidable.

Again, the issue is what monetary regime is best.   One key issue is specialization.   Entrepreneurs specialize in particular products.   The requirement that everyone set their prices and wages to make the real quantity of money accommodate the demand to hold money balances requires every entrepreneur to specialize in two areas--the production and demand for their particular product, but also the production and demand for money.    (One of the goals of index futures convertibility is to allow some entrepreneurs to specialize in maintaining monetary equilibrium.)

The argument that I found most challenging is Salerno's claim that spending has no causal significance.   I think his description of the market process where buyers and sellers first negotiate a price and then choose the amount transacted and so spending is a bit off.   Though in another passage it seemed to be suggesting that prices and quantities are jointly negotiated--I want 3 units at $2 each.   Well, I will sell you 5 units at $1.50 each.   That this involves expenditure of $6 or $7.50 is of no causal significance.

Well, perhaps I am an unsophisticated consumer, but I operate on a relatively fixed nominal budget constraint.   My income both recently earned and expected in the near future is an aggregate nominal amount.   And that constrains my total spending on goods and services.   How much I can spend on this or that good or service must add up to what I have available to spend.   I care about how much of each product  I get, but what I spend on any one purchase is what determines what I have left to spend on other stuff.

My vision of the market process is each firm setting both its price and production.  And the nominal value of the firm's output is found by multiplying that price and quantity.   That is added up for all the firms to get the aggregate value of output.   Of course, service firms, which play too small a role in my vision compared to their actual role in the economy, involve choosing a price and then producing what is sold.

Still, I do think that anticipated revenues from this output and pricing decision is very important to firms.  Revenue is what they will need to cover costs and generate a residual profit,.   It seems to me that nominal sales, and especially, expected nominal sales do play a key role in entrepreneurial decisions.  

Now, suppose we have two individuals who are self-employed, consuming part of their own product and then bartering the excess for the product of the other.   I think it is fair to say that the amount of money earned and the amount available to spend would hardly matter.   It is a barter economy after all.   Isn't this Salerno's bargaining economy where "spending" means nothing and it is all about the scale of values?

In a monetary economy where people consume close to nothing of what they produce and instead sell nearly all of it to fund purchases, how much money they earn, and more importantly, what they expect to earn, means something.  In the two person barter economy, the key question is how much corn do I eat and how much will I trade for beans which I will then eat.  In a money economy, I sell my corn for money and then that money income determines how much I can spend on a huge variety of goods and services.    How much revenue I get from selling my corn is very important.    And if I am actually paying for seed corn and fertilizer and making payments on my tractors, how much money I will make from selling corn is more obviously important--it determines the residual, which will be how much I can spend on a variety of consumer products for my own use.

To me, it is obvious that it isn't the Market Monetarists who are foolishly assuming that we can separate the real economy and the monetary economy.   Our emphasis on spending on output and nominal income clearly shows that we consider the role of money in the market process very important.

Finally, suppose that the economy is made up of a gold miner who uses most his gold to fill his teeth and for jewelry.   He trades some for corn to eat.  The corn farmer eats most of his corn, but trades some of it for gold to fill his teeth and for jewelry.   Why is money expenditures more important in this economy than when the corn farmer is bartering with the bean farmer?

Well, it isn't.     It isn't a monetary economy, and so nominal income and expenditures are not important.  In such an economy, I don't think that the exchange of gold and corn would cause any special problems.  And I don't think that having the supply of gold be more elastic would be nearly as desirable as it would be in a world of many goods and services, where firms purchase resources such as labor and use it to produce goods for sale.