Except I'm not sure you've proven there wouldn't be boom and busts. People won't suddenly start being rational because the government ain't behind the money anymore. If anything I'd expect more of them (although of a more limited scope), as individual banks fail or derp. Just because you said "market!" doesn't mean we're all going to MLP land. Plus the current currencies are, by and large, stable. Even when Argentina got bankrupt, the pesos didn't suddenly loose all its value the way a bank money would if the bank filed bankruptcy. Also, I'm not convinced that we can drow parallel to an era before we ditched the gold standard.
Gervassen, 10ebbor10 got my point. I'm not assuming government spending is the main factor behind growth, but as 10ebbor10 said, someone has to be in debt. If it's not the state, it's the private sectors, and if it's neither we either got deflation (Because we have less money for less output) or a stagnating economy (because output is not moving).
Money isn't free. The Central Bank and other banks charge interest for it, and that's my beef actually. Money velocity is a good point, I totally forgot about it. Although of course there is no way that I know of influencing it. Do you?
Also, even if inflation is a risk, it's one that's easy to manage if you got an independent central bank. Just have the central banker sit next to a lever controlling the press, looking at the inflation gauge, and make him slow the thing down when inflation goes too high. It's pretty much what they did before the crisis with interest rates.
Money velocity is trivial to change, though I'll get to that in a bit. Anyhow, the advantage about "FREE MARKET MONEY" isn't that it will turn average people into superbeings incapable of screwing up, it's that the system is (A) far more decentralized and therefore less likely to fail all at once as with the present system and (B) because banks will be allowed to fail, the more efficient and reliable currencies would tend to last where the poor ones would be less common. Present currencies are "stable" in that the major central banks, in particular the BoJ, the Fed, the BoC and the ECB coordinate the rates at which they print money and help each other out to make sure the world financial system isn't destabilized. That stability is just as likely to last as the old housing bubble was.
Money is only debt under the present fiat currency system. In a system of free banking, money would be backed by a certain amount of something, say, gold. So the Trouserbank has x grams of gold, pegs Trouserbucks to be worth a certain amount of grams of gold, and then anyone who purchases Trouserbucks can redeem them for the set amount of gold. Thus, money is a commodity rather than debt, and that problem is solved entirely.
Now back to money velocity, there are two obvious tactics that can increase the rate at which money loaned by the central bank can return to the economy. The first is the "money from helicopters" method, where it's released to the general public directly rather than the banks. The obvious problem here is that this reduces the control of the central bank over where the money goes, so if the people spend it all immediately and create drastic inflation or bury it immediately, there's far less they can do. It also defeats one of the major purposes of inflation, which is to reduce real wages in times where the economy is slowing without having to actually cut nominal wages. In the 1930s, Keynes noticed that a lot of businesses didn't cut wages because the unions and workers were unwilling to take wage cuts, which in turn reduced the ability of these businesses to react to the depression and caused unemployment to rise. So Keynes' cleverly deduced that the government could simply inflate the money so that the workers get a small wage rise that also comes with a large increase in the cost of goods. In effect, the worker has been hoodwinked into taking a pay cut and the economy can carry on as normal, though this obviously doesn't work if the worker is the first one to get the money.
The other way is to put the screws on the excess reserves of the banks. See, the Fed released plenty of money into the banking industry under the expectation that the banks would go back to lending like they did in 2006. However, the banks instead kept their money in the vaults and collected guaranteed payments from the Fed (interest on excess reserves). So the money isn't generating inflation or growth at all, so while the monetary base has increased enormously, the money supply hasn't. The Fed could basically force the banks to release this money by reducing the interest on these excess reserves, taxing excess reserves, etc but this creates the opposite problem; the banks would immediately dump their FRNs and start buying assets at the same time, which would generate massive inflation. So Ben Bernanke is stuck between the rock of recession and the hard place of hyperinflation, and has basically been hoping that the markets will spontaneously recover without any drastic action, or with merely the threat of drastic action. There isn't any ideal solution under the present model, and the "best case scenario" comes down to kicking the can a bit farther.
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Topic: Macroeconomic Musing (Read 2664 times)