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Ron Paul's Strange New Respect
Over at the reliably lefty Salon comes praise for the most recondite, yet now seemingly most vital, aspect of the Ron Paul message: fiat money has catastrophe baked right in. An excerpt:
[Paul's] prediction of doom makes a heck of a lot more sense now....
"This system that we've had since 1971 is nonviable," he said. "and it's coming to an end."
That's what this whole story is about, the end of a monetary system that we've had since 1971. And something has to give. You just can't create more money out of thin air and propping up everybody.
It's an immoral system. You're asking the poor people to bail out the rich. You're asking the innocent people to bail out the guilty. You're asking people to just totally defy the Constitution because there's no place in the Constitution that says that we can do these things.
And, besides, economically, it's a disaster. This is going to cause a great deal of harm. It's like a drug addict taking a strong fix, and he feels better for a day or two. But believe me, we're going to kill the patient. And the patient here is the dollar system and our entire world economy.
1971 was the year in which Richard Nixon abandoned the gold standard codified in the 1946 Bretton Woods agreement, thereby launching the modern era of freely floating national currencies. From Ron Paul's point of view, government economic policy ever since has been a futile attempt to avoid economic downturns by, in essence, pumping more "fiat" currency into the monetary system. The piper has come calling, says Paul, and current efforts to increase liquidity and bail out the banking system will only make things worse.
So if things do get even worse, was Ron Paul suggesting that he's ready for another run at the gold ring in 2012?
But right now there's a fight going on in this country. Our numbers are growing. We're not the majority, but our numbers are growing. And as this situation deteriorates, more people are going to say, "Hey, maybe it's right. Maybe limited government and freedom works. Maybe freedom is popular, and maybe freedom really works." And this idea that we have to depend on government for all these programs is an illusion.
It will almost certainly not be Paul waving the flag for these ideas in 2012; I might guess given the very presence of pieces like this at Salon that any anti-fiat money politician, if we have any in 2012, will more likely be from the Left than the traditional Right.
My reason feature on the Ron Paul Revolution, from our February 2008 issue.
Hat tip: Faithful reader known as "the innominate one."
emac|10.17.08 @ 1:16PM|#
Everyone knows fiat money is a-ok....Milton Friedman told me
so!!
I've always wondered why the Left has never made fiat money an
issue; after all, an inflationary monetary system punishes the poor
worse than anyone else in society (through higher prices)
I suppose it is because 1) they trust the govt to do the "right
thing", and 2) they are economic imbeciles.
TallDave|10.17.08 @ 1:17PM|#
Sigh. Fiat currency is not going away.
This just makes libertarian ideas look silly by association.
TallDave|10.17.08 @ 1:19PM|#
after all, an inflationary monetary system punishes the poor
worse than anyone else in society (through higher
prices)
Except for the small problem that non-fiat currencies experience
liquidity shocks that lead to massive business failure and rampant
unemployment.
James B.|10.17.08 @ 1:20PM|#
I wonder what would have happened had the panic/meltdown
happened back in the winter?
It would obviously have helped Paul, and probably doomed McCain.
Romney and Huckabee could have run against the bailout, maybe
Richardon on the Dem side. I think anyone in Washington (Obama,
McCain, Hillary, Dodd, Biden) would have had no chance against a
fired up electorate with choices that didn't vote for a
giveaway.
the innominate one|10.17.08 @ 1:22PM|#
Brian, glad to know I'm not the only one here reading
salon.com
I just emailed hitandrun@reason.com about this article ~10 minutes
before you posted this
great minds think alike
|10.17.08 @ 1:23PM|#
you know what gets kind of tiresome? The constant refrain of
"The Austrians got it right...all hail the Austrians!" I suppose
that if I predicted gloom-and-doom disasters for 30+ years, I'd be
inclined to get one right, too.
Like Nostradamus.
Seward|10.17.08 @ 1:45PM|#
TAO,
I don't know if many (or any) Austrian economists did that
actually.
kinnath|10.17.08 @ 1:45PM|#
Andres=w Leonard is one few writers that consistantly produce
stuff worth reading at Salon.
Solon is now a mere shadow of what it was years ago.
the innominate one|10.17.08 @ 1:46PM|#
TAO, good point
Asharak, good point also
though to be fair, I have no idea if he's right on this issue, he's
just so obviously been wrong on others that I am suspicious
emac|10.17.08 @ 1:47PM|#
Except for the small problem that non-fiat currencies
experience liquidity shocks that lead to massive business failure
and rampant unemployment.
I would strongly disagree with that for several reasons, but
assuming for a moment that was remotely true, you still must trust
the govt and central banks to 'manage' that fiat currency properly
- i.e. expand (and contract) the money supply based on economic
growth (and contraction), etc, etc. There is no room for printing
money the govt does not have to fund wars, welfare, entitlements,
etc, as they ALWAYS do, and continue to do so today. Do you really
trust a government (any government) to do that?
This is why every fiat currency is the history of the world has
eventually become worthless, as will the fiat dollar (someday).
Money backed by nothing is ultimately worth nothing, always has
been, always will be. Even in the 'modern' world.
|10.17.08 @ 1:50PM|#
emac - when you say "money backed by nothing", what do you mean? The money is backed by confidence in the strength of a FRN. I don't see any more or less rationality in considering that as "worth something" than some shiny stuff that comes out of the ground.
Paul|10.17.08 @ 1:54PM|#
I've always wondered why the Left has never made fiat money
an issue;
It was largely the left and populists that wanted to get off the
gold standard because they believed that adherence to the standard
shackled working class people and farmers to debt.
|10.17.08 @ 1:56PM|#
Except for the small problem that non-fiat currencies
experience liquidity shocks that lead to massive business failure
and rampant unemployment.
Isn't the point that fiat currencies experience liquidity shocks
and lead to massive business failure and rampant
unemployment.
Like, right now?
|10.17.08 @ 1:57PM|#
I'm going to go with TallDave and TAO on this one. The idea that gold is good money because it has inherent value is simply dumb. The idea that monetary policy should be decided by the relative abundance of a particular mineral in the earths crust is disasterous in a modern economy. There is no "value" except as defined by claims on useful items - a purpose for which paper is equally as suited as gold, and infinitely easier to implement.
Seward|10.17.08 @ 1:57PM|#
Except for the small problem that non-fiat currencies
experience liquidity shocks that lead to massive business failure
and rampant unemployment.
Is that what causes it or is government intervention to pump up the
value, etc. of particular types of investments which causes it? For
example, in the 19th century government (particularly at the state
level but also at the federal) did a lot to bring on "bubbles" by
pursuing policies which led to overvalued land and railroads.
|10.17.08 @ 1:58PM|#
It was largely the left and populists that wanted to get off
the gold standard because they believed that adherence to the
standard shackled working class people and farmers to
debt.
Hahahahahahahahahahahahhahahaha.
Ha.
Ha.
*sob*
|10.17.08 @ 1:59PM|#
Sigh. Fiat currency is not going away.
This just makes libertarian ideas look silly by
association.
Lots of silly ideas have become unsilly in the past couple of
years.
Like nationalizing the banks.
|10.17.08 @ 2:00PM|#
Innominate One---In fact, you hipped me to it. Neglected to give you a hat tip--will add it in now.
|10.17.08 @ 2:01PM|#
gold shocks happen too. and population shocks (the real moentary supply is currency/person) credit bubbles happen whenever there is credit - the fact that we have fiat currency which is essentially credit is unrelated, unless you propose getting rid of lending.
JD|10.17.08 @ 2:05PM|#
IMO, fiat money and monetary policy in general aren't big
starters in politics because they're too abstruse and theoretical.
I mean, they're not, really, but they certainly seem that way to
most people. Let's face it, it's a lot easier to sell "OMG, they
want to raise taxes!" or "OMG, they want to start another war!"
than "OMG, they think the currency should be backed by a 'basket'
of commodities determined by a regulatory panel!" Doesn't quite
have the same ring, you know?
I'm not a huge goldbug, but I do think that saying "Fiat
currency is here to stay, so STFU" is unhelpful, though. The US
only went off the gold standard within living memory (barely), and
the Bretton Woods agreement, the end of silver certificates, and
1971 are much closer in time. The idea that the current system was
handed down from Mount Olympus never to be changed, amen, is just
silly.
robc|10.17.08 @ 2:07PM|#
domo,
Of course, Ron Paul doesnt suggest a gold standard. His suggestion
is multiple currencies, without a government backed one. We would
have gold standard currencies, silver standard ones, S&P500
standard ones, whatever you want backed ones.
Tom W (Fla. not FL)|10.17.08 @ 2:11PM|#
I suppose it is because 1) they trust the govt to do the
"right thing", and 2) they are economic imbeciles.
Yep. They thought/think Keynesian demand stimulation through
inflationary government spending and artificial reduction of
interest rates would help the poor the most.
|10.17.08 @ 2:12PM|#
I don't advocate fiat currency because it's inevitable - I genuinely believe it's a better system. I also am a fan of the Fed, and have defended it on other occassions. Chicago school all the way. Austrian economics always struck me as a little shallow in it's understanding of money and credit.
Paul|10.17.08 @ 2:12PM|#
The tough part is creating a non-fiat currency (backed) that
allows the creation of wealth. It's the holy grail, if you
will.
They thought/think Keynesian demand stimulation through
inflationary government spending
See: Stagflation, something Keynes thought would never happen.
|10.17.08 @ 2:15PM|#
robc,
I've had the mulitple money argument before too. It's not that I
think it's a terrible idea, just kind of a waste of time. We have
competeing money - gold (e-gold) silver, oil, barter clubs,
cigarettes and fish (in prison...). the people that advocate for
more competition ignore the seeming fact that there is - just that
handy paper stuff keeps winning.
Paul|10.17.08 @ 2:18PM|#
robc, can we have pony-backed currency? I hear everyone's
getting one.
Funny you say this, but to a certain degree, that's what they're
trying to give us.
The Fed, Treasury and Presidential candidates are basically
attacking the "confidence" problem in the markets by promising
everyone a pony. The theory being that if everyone thinks they're
getting a pony, market liquidity will return...
|10.17.08 @ 2:20PM|#
The theory being that if everyone thinks they're getting a
pony, market liquidity will return...
Their plan makes perfect sense. Ponies pee a lot.
Jerry|10.17.08 @ 2:21PM|#
just that handy paper stuff keeps winning
It's called legal tender law FYI.
|10.17.08 @ 2:21PM|#
The money is backed by confidence in the strength of a
FRN.
:hearty chuckle:
OK, so I offered you ten bucks, you wouldn't take it?
I didn't think so.
|10.17.08 @ 2:22PM|#
The idea that gold is good money because it has inherent value is simply dumb.
It is dumb, which is why that is not the reason for having a gold
standard. It is that the supply of gold is relatively stable, and
outside the control of the government. Therefore it is hard to
inflate.
Plus, gold is yellow and shiny and looks good on my skin!
emac|10.17.08 @ 2:22PM|#
TAO, nothing at all is backing up the FRN, and
certainly not 'confidence'. But Americans (and the world) have had
confidence in unbacked notes in the last several decades, and that
(and only that) is what has allowed this system to continue. Once
that confidence ends, so does the system, and the value of the
currency.
As for that 'shiny stuff', there is a limited amount of it, and
that is precisely what makes it worth something, unlike
dead trees and bank credits on a computer, which are very renewable
resources, and can be (and are) created arbitrarily. If some of you
don't understand the distinction, then I'm sorry but you really
don't understand monetary policy.
|10.17.08 @ 2:23PM|#
Of course, Ron Paul doesnt suggest a gold standard. His
suggestion is multiple currencies, without a government backed one.
We would have gold standard currencies, silver standard ones,
S&P500 standard ones, whatever you want backed ones.
Speaking of hard currency.
How about a porn standard? Porn is in ready supply everywhere,
holds its value at least for a several decades, costs very little
to produce, and is consistenty in high demand. (Judging by the
profits of online porn sites.)
If pornographers could issue porn-backed securities, I'm betting
that they would pay pretty good returns.
|10.17.08 @ 2:23PM|#
We do NOT have competing currencies due to our 'legal tender' laws. Get that one repealed and then let's talk.
robc|10.17.08 @ 2:25PM|#
domo,
Other people have mentioned the legal tender laws. In addition to
that, I would point out what happened to one of your examples - the
e-gold people.
|10.17.08 @ 2:27PM|#
How about a porn standard?
It's too easy to cause inflation by defining porn downwards. When
they call Miley Cyrus completely covered in a towel "pornographic"
the market's will roil.
And besides, if you think dumb chicks from the Midwest who like
cocaine aren't as plentiful as dead trees and ink...
MAX HATS|10.17.08 @ 2:27PM|#
The "Cross of Gold" speech wasn't intended to move America to a floating currency. It was an argument in favor of pegging the dollar to silver instead. That was the argument of the time - gold v. silver standard. Not too tremendously relevant to the present.
Paul|10.17.08 @ 2:28PM|#
. It is that the supply of gold is relatively stable, and
outside the control of the government.
I usually stay quiet during these gold standard debates, but I'm
speaking up on this one.
First: I'm distrustful of a gold-standard for a host of reasons.
Reasonable people can disagree. However...
The above statement is entirely untrue. There's nothing that
guarantees the supply of gold, unless what you're referring to is
the amount of gold that exists in the world, regardless of
who controls it.
Second, assuming you're not talking about the amount of
'existing' gold, the supply of gold can and will be entirely under
government control. There's nothing stopping the government from
making it illegal to own gold, and then follow that action by
hoarding it, then printing money based on this amount of gold--
lying about the amount of gold that's backing it.
Kolohe|10.17.08 @ 2:29PM|#
I've always wondered why the Left has never made fiat money
an issue; after all, an inflationary monetary system punishes the
poor worse than anyone else in society (through higher
prices)
Historically the left in america (loosely defined) has been in
favor of fiat currency (or it's antecendent 'free silver') because
typically the downscale tended to have more debt than average,
while the upscale tended to have more assets.
Fluffy|10.17.08 @ 2:29PM|#
The idea that gold is good money because it has inherent
value is simply dumb.
Well, if Icelanders had gold in their pockets, they'd be able to
buy food and eat.
Right now they have in their pockets, instead, a currency that has
no value in international exchange, and they very well may NOT eat.
And soon.
emac|10.17.08 @ 2:31PM|#
With fiat currency, the best you can ever hope to have is
ever-expanding government, rising prices, corruption, and eventual
debasement of the currency until collapse (which is always quite
chaotic), and then the establishment of a new fiat currency, and a
repeat of this cycle over and over again. To expect anything else
out of government is naive.
I think I would rather deal with some of the minor inconveniences
(if you can call them that) of commodity money than to go through a
Weimar Germany or Zimbabwe situation every few decades.
Personally, I do not advocate a gold standard as such, but a
separation of money and state; let the market determine what money
is. I guarantee you, every time it will be something scarce and of
value, like it always has in the past, and like it always will in
the future.
Fluffy|10.17.08 @ 2:31PM|#
There's nothing stopping the government from making it
illegal to own gold, and then follow that action by hoarding it,
then printing money based on this amount of gold-- lying about the
amount of gold that's backing it.
If the currency can't be exchanged for actual gold, the currency
cannot actually be said to be backed by gold.
Therefore a country that made the private ownership of gold illegal
wouldn't actually have a gold-backed currency, regardless of what
their press releases said about the matter.
|10.17.08 @ 2:31PM|#
"It's called legal tender law FYI."
there are other options - barter, e-gold, payment in kind. They
exist and are not illegal. The only thing you need $ for is to pay
taxes - so to that extent you are right. My point is that
alternative monies don't seem to be taking off.
"It is that the supply of gold is relatively stable, and outside
the control of the government. Therefore it is hard to
inflate.
Plus, gold is yellow and shiny and looks good on my skin!"
Yes, and my point is that the demand for currency is not stable,
and the supply of gold is not related in any way to the demand for
currency. Moreover, credit is still necessary and will exist
regardless of the currency backing - meaning even with gold
backing, bubbles and crashes will happen. So: gold standards will
not prevent bubbles/crashes, and inflation and deflation will still
happen as supply will be contolled completely arbitrarily and with
no regard for the easily determined level of demand.
Kolohe|10.17.08 @ 2:32PM|#
That was the argument of the time - gold v. silver standard.
Not too tremendously relevant to the present
I was writing my last as you wrote this.
'free silver' because of the disparate availability of silver in
the late 19th century would have been only slightly different than
just printing money straight up. Though the difference would have
been 'who' (west vs east)
Paul|10.17.08 @ 2:33PM|#
MAX HATS:
True, but it does have relevance. It's reasonably clear that the
Silverite movement was a precursor to elimination of a "backed"
standard. The whole point of the Silverite movement was to greatly
expand the money supply and thus the economy. It was, in a way, the
very definition of saying *poof* now you have 10 dollars in your
pocket, instead of one.
Advocates predicted that if silver were used as the standard of money, they would be able to pay off all of their debt. The debt amount would stay the same but they would have more silver money with which to pay it.
http://en.wikipedia.org/wiki/Silverite
|10.17.08 @ 2:35PM|#
robc - looked up the e-gold people just the other day - got dinged for money laundering. their company is still in operation, so obviously the beef was not with using alternative money - it was with moving money around for criminals.
Paul|10.17.08 @ 2:36PM|#
Therefore a country that made the private ownership of gold
illegal wouldn't actually have a gold-backed currency, regardless
of what their press releases said about the matter.
Fluffy, I agree with you in principle, but why, then do we say the
gold standard was eliminated in 1971 when clearly, it was repealed
(for a time) in 1933?
|10.17.08 @ 2:38PM|#
Paul brings up a good point - that a currency backed by gold is meaningless unless its is freely convertible to specie. What's more - under a fractional banking system (which we had EVEN UNDER THE GOLD STANDARD) there is very little difference between fiat currency and gold backed currency. You can still have runs, and panic induced tightness of money like we have now. A piece of paper that says backed by gold is not better than one that says legal tender if it's not 100% backed.
|10.17.08 @ 2:38PM|#
If some of you don't understand the distinction, then I'm
sorry but you really don't understand monetary policy.
Disagreeing with you ! = not understanding monetary policy.
A credit-based monetary system is far more realistic in light of
global capitalism. No nation can get away with dangerously
destabilizing its currency because of international trade
tension.
Urkobold™|10.17.08 @ 2:39PM|#
THE URKOBOLD REJECTS FIAT MONEY. INSTEAD, HE USES GOLD. GOLD-PAINTED WOMEN, THAT IS. YOUNG MAN, HERE'S A GOLD-PAINTED WOMAN FOR YOUR TROUBLE. NO, NO, KEEP THE CHANGE.
robc|10.17.08 @ 2:42PM|#
domo,
I was thinking Liberty Dollar, not e-gold. Either way, alternate
currencies get hounded by the feds.
Jerry|10.17.08 @ 2:43PM|#
Well, if Icelanders had gold in their pockets, they'd be able to buy food and eat.
Right now they have in their pockets, instead, a currency that has no value in international exchange, and they very well may NOT eat. And soon.
How about salted herring in aluminum cans. That should work for
Iceland.
robc|10.17.08 @ 2:45PM|#
domo,
it was with moving money around for criminals.
The fed moves money around for criminals all the time. Criminals
regularly use fiat money, but that does mean the treasury dept gets
shut down.
Paul|10.17.08 @ 2:47PM|#
The fed moves money around for criminals all the
time.
Translation: Criminals move money around for other criminals all
the time.
Kolohe|10.17.08 @ 2:53PM|#
How about salted herring in aluminum cans. That should work
for Iceland.
Bring back to cod standard. We will party like it's 1699.
Joe|10.17.08 @ 3:03PM|#
The Angry Optimist | October 17, 2008, 1:23pm | #
"you know what gets kind of tiresome? The constant refrain of "The
Austrians got it right...all hail the Austrians!" I suppose that if
I predicted gloom-and-doom disasters for 30+ years, I'd be inclined
to get one right, too.
Like Nostradamus."
What they got right was cause and effect. Loose credit brings about
investment dislocations whichs brings about an asset bubble whichs
brings about an eventual asset deflations and we end up being less
wealthy than we thought we were. What's worse is that loose credit
and subsequent malinvestment diverts real resources away from
worthwhile investments in technology, infrastructure, etc. In other
words, insetad of buying a house one couldn't afford, some people
might have invested their money in alternative energy, biotech or
healthcare efficiencies.
|10.17.08 @ 3:12PM|#
"The fed moves money around for criminals all the time.
Criminals regularly use fiat money, but that does mean the treasury
dept gets shut down."
Hmmmm, no. The fed does not move money around for criminals - it
moves money around for banks. Banks move money around for criminals
and are routinely subjected to investigation. They generally
cooperate, unlike kooky alternate money people who tend to conflate
their enterprise (which might serve a legit purpose) and their
politics. When they do this, they end up ruining their credibilty -
which is sacrosanct if you want to be in the banking business.
Tacos mmm...|10.17.08 @ 3:13PM|#
It is that the supply of gold is relatively stable, and outside the control of the government. Therefore it is hard to inflate.
Deflation becomes a problem, then, as the gold supply remains
relatively stable while populations increase. I've never seen a
discussion of how goldbugs deal with deflation, which seems locked
into any non-fiat system, and is markedly worse in its economic
effects than inflation.
|10.17.08 @ 3:14PM|#
"What they got right was cause and effect. Loose credit brings
about investment dislocations..."
Exactly - this is also what the chicagoans got right - only without
the odd fixation on fiat currency as the reason for credit.
|10.17.08 @ 3:22PM|#
tacos - bravo. usually what happens is that nominal interest rates become exceedingly high. With deflation, you get paid to sit on cash - so you need a very high interest rate to induce you to lend it. Deflation pays you to be risk averse and hoard cash - which induces chrinically tight money, and stifles the risky ventures upon whose success technological progress is made.
Travis|10.17.08 @ 3:24PM|#
"Deflation becomes a problem, then, as the gold supply remains
relatively stable while populations increase. I've never seen a
discussion of how goldbugs deal with deflation"
Alchemy.
robc|10.17.08 @ 3:26PM|#
I've never seen a discussion of how goldbugs deal with
deflation
1. Get pan
2. Find River
3. Shake
robc|10.17.08 @ 3:27PM|#
The fed does not move money around for criminals - it moves
money around for banks.
So, does domo need to get added to the list of humor impaired?
Paul|10.17.08 @ 3:29PM|#
I guess I just don't get why libertarians would be for a form of
wealth which had a limited and stable supply.
As a libertarian I certainly understand and am wary of all the
problems a fiat currency system bring. Duly noted.
But to concieve of a system where there is literally an economic
pie, and any slice taken from it is one less slice for someone else
seems dubious.
While there are good arguments about a gold standard bringing
stability to markets, I've never heard a good argument about wealth
creation-- something which is at the core of nearly every other
libertarian argument.
|10.17.08 @ 3:31PM|#
It seems to me the problem is that the FED is a private institute that is not accountable to Congress and secondly it seems to have no control over how much money it creates. I think the gold standard limited the amount of money or inflation the fed could create.
Paul|10.17.08 @ 3:35PM|#
1. Get pan
2. Find River
3. Shake
Then immediately deliver said prospected gold to any Federal
Reserve bank within three days of discovery as described in the
Executive Order. Upon receipt of gold the Federal reserve bank or
member bank will pay thereof an equivalent amount of any other form
of coin or currency coined or issued under the laws of the Unites
States.
Reformed Republican|10.17.08 @ 3:36PM|#
Tacos, please explain why having my money becoming more valuable over time is a bad thing. It seems preferable to having it worth less over time.
Hibiscus Monkey|10.17.08 @ 3:39PM|#
Positioning libertarian ideas as opposed to "mainstream" economics is not advantageous for the movement.
emac|10.17.08 @ 3:43PM|#
Disagreeing with you ! = not understanding monetary
policy.
I did not say that. You said:
The money is backed by confidence in the strength of a FRN. I
don't see any more or less rationality in considering that as
"worth something" than some shiny stuff that comes out of the
ground.
Just because the world has confidence (for now) in the fiat dollar,
certainly does not mean it is "backed by confidence" (I don't even
know what that means). My point was that one backing has value
(gold), the other (ultimately) does not. But IMO the worst aspect
of fiat money is not its lack of value, but its role as an enabler
of the growth of govt. Giving the state the power to create money
gives them the power to grow and spend without taxing or borrowing,
all the while stealing from us yet again by making our money worth
less and less.
Make no mistake: there is one - and only one - root cause that has
allowed the massive growth of the federal govt over the last 100
years, and that is central banking. I didn't understand the dangers
of fiat currency either, before I did understand them. As long as
libertarians continue to shill for central banking as necessary for
a modern global economy, to fight 'deflation', ensure liquidity,
prevent depressions, etc, etc, etc, then we are doomed to having
our greatest warriors against statism fight with both arms and one
leg tied behind their back.
Tacos mmm...|10.17.08 @ 3:50PM|#
Tacos, please explain why having my money becoming more valuable over time is a bad thing. It seems preferable to having it worth less over time.
A number of reasons, as it encourages liquid holdings over less
liquid ones (such as higher education) and encourages holding
liquid currency as opposed to spending it. Currency is hoarded
instead of invested, and capital decreases (why by a stock or loan
cash when your money will become more valuable just sitting under
your bed, without you having to sacrifice liquidity or take on
risk?). Deflation functions to increase interests rates, making
loans more expensive.
With no one spending or borrowing money, production drops and you
move toward recession. Businesses lay off people as the real cost
of wages increases while sales decrease, etc, etc, etc. The number
of problems caused by deflation is myriad and probably best
enumerated elsewhere.
Even Austrian economists view deflation caused by contraction of
the money supply as bad, so I'm uncertain as to how this is
reconciled with non-fiat currency.
Tacos mmm...|10.17.08 @ 3:54PM|#
But IMO the worst aspect of fiat money is not its lack of value, but its role as an enabler of the growth of govt. Giving the state the power to create money gives them the power to grow and spend without taxing or borrowing, all the while stealing from us yet again by making our money worth less and less.
My understanding is that this is the reason that the Austrian
school opposes fiat currency - it allows those close to the central
banks to disproportionately reap the benefits of the changing money
supply. I think that this ignores the fact that in non-fiat
currency system, some parties are always able to position
themselves to deal with the inevitable deflation better than others
as well.
emac|10.17.08 @ 3:55PM|#
Deflation becomes a problem, then, as the gold supply
remains relatively stable while populations increase. I've never
seen a discussion of how goldbugs deal with deflation
Why should "goldbugs" have to *deal* with this in the first place?
Are they running the economy? Either we have an honest money
system, or we do not. Let the economic chips fall where they may.
Is this not what the free market is supposed to be about?
Deflation pays you to be risk averse and hoard cash - which
induces chrinically tight money, and stifles the risky ventures
upon whose success technological progress is made.
Maybe this is true, but why should one class of people (savers, the
poor, those on fixed incomes, etc) be robbed of wealth to provide
credit to "risky ventures" through a fraudulent monetary system? Is
not a fair, honest, free-market system the goal, not gaming the
system to ensure maximum "technological progress"? Call me a
left-winger if you will, but I always thought liberty was about
being fair, not expedient.
|10.17.08 @ 4:00PM|#
Paul | October 17, 2008, 2:28pm | #
...the supply of gold can and will be entirely under government control. There's nothing stopping the government from making it illegal to own gold, and then follow that action by hoarding it, then printing money based on this amount of gold-- lying about the amount of gold that's backing it.
Gee, my history must be rustier than I thought. Isn't that EXACTLY
what we did in this country, starting in 1933? And you forgot the
part about forcing citizens to sell the Gov their gold at an
arbitrary price well below market. And you thought eminent domain
only worked on real estate.
emac|10.17.08 @ 4:13PM|#
I think that this ignores the fact that in non-fiat currency
system, some parties are always able to position themselves to deal
with the inevitable deflation better than others as
well.
I don't think it ignores it at all; it is the market deciding who
benefits from deflation - or any other conditions that exist in the
market, much like how it decides which businesses succeed or fail
based on their ability to fulfill consumer desires. Under the
central bank/fiat system, as you said it is the state and those
closest to it that benefit (unfairly).
Yes, there will be winners and losers - just like in all of
capitalism - but it is fair if the market (not the state) decides,
and I think all non-socialists would ultimately agree.
Tacos mmm...|10.17.08 @ 4:14PM|#
Why should "goldbugs" have to *deal* with this in the first place? Are they running the economy? Either we have an honest money system, or we do not. Let the economic chips fall where they may. Is this not what the free market is supposed to be about?
Because I'm a libertarian, not an anarchist. I think that a certain
amount of government is a necessity. Contract enforcement, for
example, is a necessary and market-promoting function of
government. Other government interventions have actually proven
helpful in the past and even been more efficient than private
endeavors - standardized weights and measures being one. I would
put fiat currency into this catagory.
Maybe this is true, but why should one class of people (savers, the poor, those on fixed incomes, etc) be robbed of wealth to provide credit to "risky ventures" through a fraudulent monetary system?
None of those catagories of individuals are necessarily helped by
deflation. Delfation promotes liquidity hoarding, which is the
exact opposite of what you want in a functioning economy. You don't
want people keeping their savings under their beds - you want that
money to be out in the world, promoting new enterprises. Deflation
does provide some benefit to people whose economic assets consist
primarily of cash, but this is a small portion of the population,
even among the elderly or poor (many of whom may have most of their
value in a house, which is far from liquid). Also, the problems
created by an overall ecnomic slowdown would hurt these classes
more than the marginal increase of the dollar in their
pockets.
Is not a fair, honest, free-market system the goal, not gaming the system to ensure maximum "technological progress"? Call me a left-winger if you will, but I always thought liberty was about being fair, not expedient.
I believe in free markets because I believe that they were the most
efficient engines of progress. I guess I'm a utilitarian.
|10.17.08 @ 4:17PM|#
The idea that gold is good money because it has inherent value is simply dumb.
No it isn't. Allow me to explain:
Women like things made of gold.
Gold can get you laid.
Hence it has inherent value.
Paul|10.17.08 @ 4:28PM|#
Gee, my history must be rustier than I thought. Isn't that
EXACTLY what we did in this country, starting in 1933? And you
forgot the part about forcing citizens to sell the Gov their gold
at an arbitrary price well below market. And you thought eminent
domain only worked on real estate.
Kant, you're not studying your Agrippa. Allow me to quote
myself:
Fluffy, I
agree with you in principle, but why, then do we say the gold
standard was eliminated in 1971 when clearly, it was repealed (for
a time) in 1933?
It's ok, I don't read all the comments either. So it's all
good.
concerned observer|10.17.08 @ 4:36PM|#
Welcome to the libertarian circlejack. THat's right, the crisis wasn't caused by deregulation, it was caused by evil fiat money! Which was championed by the left! The evil leftists are out to take away our freedom. None of you imbeciles knows anything about monetary policy, so just shut up. Or maybe read Keynes rather than Rothbard or Friedman, for once.
Sam Grove|10.17.08 @ 4:39PM|#
The idea that gold is good money because it has inherent
value is simply dumb.
History shows that gold is long term stable.
The main value of precious metals is that they can't be churned out
of a printing press.
The problem with government notes is that they can be printed as
desired and imposes a hidden tax on people.
There is no reason that gold or any other metal need be established
as "the" standard.
There is not fundamental reason there can't be competing
currencies, and there is no reason that credit can't be extended
co-existent with metal currency.
Another advantage of precious metals is they can be easily
standardized by weight while the value is determined by the
market.
Austrian economists don't understand money?
I venture to suggest that what matters is that Austrian economics
understands the matter a little more fundamentally than
money.
Production precedes consumption.
concerned observer|10.17.08 @ 4:39PM|#
Of course, none of you here are goint to take my advice. Youre all going to go to your room in the basement of your parents' house, read Atlas Shrugged, and then say a prayer to John Galt to quicckly come and deliver from the "looters" and "moochers".
squarooticus|10.17.08 @ 4:41PM|#
Taco:
I believe in free markets because I believe that they were the most efficient engines of progress. I guess I'm a utilitarian.
So I guess if enslaving you would produce better outcomes overall,
you'd be in favor of that, right?
Paul:
I guess I just don't get why libertarians would be for a form of wealth which had a limited and stable supply.
Gold as a store of value and medium of exchange has nothing to do
with the total wealth in the world. Total wealth is best measured
by productivity, i.e., how much work can be done for a particular
amount of input resources (labor, raw materials, etc.). This will
continue to rise as the result of technological progress regardless
of whether bits of paper are money or bits of metal are
money.
The virtue of gold as money is that it will reduce substantially
the ability of bubbles to form (and then pop) because capital will
be fairly priced by the market rather than underpriced by the Fed,
making capital more likely to flow to productive rather than
speculative investments.
The Austrians were right, and should trumpet it. It's not like they
made 1,000 different predictions and one of them finally came true:
they made a few simple predictions, all of which are being
demonstrated by the credit crisis.
The only thing left is the Crack-up Boom, which I suspect will
proceed apace as central banks around the world dump more paper
money into the system, devaluing it quickly enough that people
decide they need to spend their money now on anything
tangible, because tomorrow it will be worth far less.
Russ 2000|10.17.08 @ 4:41PM|#
Fluffy, I agree with you in principle, but why, then do we
say the gold standard was eliminated in 1971 when clearly, it was
repealed (for a time) in 1933?
It wasn't repealed for a time in 1933. It was repealed permanently
in 1933 for everyone except other governments' central banks and
foreigners rich enough to travel with enough notes to make it
worthwile to travel to the US for the exchange. All you could
convert to after 1933 was silver. And that ended in 1964.
You can redeem your Federal Reserve Notes for sacks of 5-cent
pieces if you require intrinsic value in your money. But the
handling costs outweigh the practicality.
concerned observer|10.17.08 @ 4:42PM|#
but really your idea of competing currencies would cause monetary chaos, even worse than the gold standard. if someone holds all their wealth in silver "dollars" and then "Teh Market" decleares the dollars to be half their original value, youre screwed. No one would be able to have confidence in the value of money. In a PROPERLY-regulated fiat money system, however, there is a degreee of stability that allows the economy to function smoothly.
SIV|10.17.08 @ 4:42PM|#
Deflation does provide some benefit to people whose economic
assets consist primarily of cash, but this is a small portion of
the population
We may be a small part of the population but I like to think of
myself as the most important part of it.
emac|10.17.08 @ 4:44PM|#
Contract enforcement, for example, is a necessary and
market-promoting function of government. Other government
interventions have actually proven helpful in the past and even
been more efficient than private endeavors - standardized weights
and measures being one. I would put fiat currency into this
catagory.
There is a very big difference between contract enforcement and
imposing standardized weights & measures, fiat currency, or
anything else on the people. It does not matter how helpful
anything has proven to be in the past (and that's debatable), the
state has no right to do these things. The people and the
market should decide what kind of money or weights & measures
or whatever they want, and if the state has any role at all, it
should be to protect its citizens against force and fraud and
that's all.
None of those catagories of individuals are necessarily helped
by deflation. Delfation promotes liquidity hoarding, which is the
exact opposite of what you want in a functioning economy. You don't
want people keeping their savings under their beds - you want that
money to be out in the world, promoting new enterprises
But see, this is exactly my point. It is not the business of the
state who is or is not helped by deflation, or where savings go, or
any other market condition. In a free market, the market decides
these things. You make some good observations that I cannot
necessarily disagree with, but who are you (or me, or the state) to
decide in which direction the economy ought to go? Any foray into
what ought to be or what shape the economy ought to take is IMO
nothing more than social engineering, which I do not believe to be
very libertarian. Do you see the point I'm making? Freedom may not
send society in the direction that you (or I) want, but IMO it
beats the alternatives.
Obviously, we want different things, and I guess we will have to
agree to disagree ;) To me, it's the difference between a 'radical'
libertarian and a Barr-type libertarian (not that you necessarily
support Barr). I guess I find myself in the radical camp at this
point.
concerned observer|10.17.08 @ 4:44PM|#
@squarooticus-Tacos is right. While it may piss you off to here that the main reason that inequality from the market can be tolerated is that it produces better overall results, that happens to be what most of the rest of humanity thinks, so you better get used to it.
Sam Grove|10.17.08 @ 4:46PM|#
None of those catagories of individuals are necessarily
helped by deflation. Delfation promotes liquidity hoarding, which
is the exact opposite of what you want in a functioning economy.
You don't want people keeping their savings under their beds - you
want that money to be out in the world, promoting new
enterprises.
What prompts people to put their gold under their mattress is
devaluation of notes.
Devaluation means lower prices thus enabling people to buy more
with their money, hence the money won't be hidden, it'll be used.
People won't stop investing, they'll always want more than
deflationary returns.
There is no way that people will stop consuming because their money
is increasing in value. They'll consume more. When money increases
in value it's equivalent to having more money.
concerned observer|10.17.08 @ 4:48PM|#
While we're at it- you don't seriously think that we should have multiple systems of weights and measures, do you? Its bad enough that the US wont join the world and use the metric system, but I cant stand thinking what it would be like if no one knew exactly what "pound" was. There goes your contract enforcement. "But you see, I define the pound differently, which is why I gave you only one tenth of what you define a pound as."
concerned observer|10.17.08 @ 4:49PM|#
Maybe you could actually learn what Keynes had to say about the money supply, public spending, and business cycles. If it doesn't shatter your comfortably constructed libertarian world.
Sam Grove|10.17.08 @ 4:52PM|#
In a PROPERLY-regulated fiat money system,
There's the rub, eh?
Even Friedman
gave up on that idea.
Sam Grove|10.17.08 @ 4:55PM|#
Its bad enough that the US wont join the world and use the
metric system, but I cant stand thinking what it would be like if
no one knew exactly what "pound" was. There goes your contract
enforcement.
This reveals your comprehension of how the market works. How do you
think the cassette tape was standardized? The government didn't do
it.
A standard is adopted because of its value to the adopters.
Paul|10.17.08 @ 4:56PM|#
Squarerooticus:
I understand all that. Really I do. But it still leaves unanswered
questions. Like I said in an obscure, mostly ignored post above, I
tend to lean towards a backed system, I just don't know which. I
also recognize all of the problems of the fiat system. I know
inherently that a government can't just dump money in a market to
stablize it.
However, in the expansion of wealth department, since most (every)
modern government seems to agree that we're going to have a legal
tender system for trade (scale, efficiency, speed of transaction)
eventually everyone has to be paid for their productivity in legal
tender. I still don't see how an increasing population with
increasing productivity won't suffer a deflation problem with a
pure gold standard.
It's certainly easy to create simplified scenarios. For instance,
if someone provided me a house, food and clothing incompensation
for my productivity, that's "wealth". But the point is that
"wealth" doesn't have equal value under all parallel circumstances.
For instance, while my food, clothing and shelter may have
considerable value to me, it may have little or no value to someone
else. So in the end, I have to be able to convert it to some sort
of universally recognized legal tender. How that tender is backed
(or not backed) is of considerable importance.
As I said, I have no doubts that gold standards produce a more
stable market, but I don't yet see how we translate the expanding
productivity and wealth into a universally recognized system of
legal tender without devaluing that legal tender.
Basically, I'm skeptical of all the easy answers, because I think
there are none when it comes to monetary policy.
concerned observer|10.17.08 @ 4:57PM|#
@Sam Grove-then how come before sttandard weights and measures were adopted and enforced by governments, people used competing (and ineffiecent) systems of measurement?
concerned observer|10.17.08 @ 5:01PM|#
@Paul-At least youre right on that. There are no easy answers in monetary policy. ANd blaming all the woes of the financial sector on the big bad fed won't help at all, because thats not the main issue. The current crisis is9/10 lack of governemtn policy and 1/10 bad governmetn policy.
|10.17.08 @ 5:02PM|#
Fiat money is awesome. You can hire a man like Alan Greenspan to
use his infinite wisdom to fine tune those interest rates and
inflate the monetary supply so that the economy is not too cold and
not too hot - it's juuuust right!
Fiat money kicks ass! Inflation kicks ass!! All you boring old
commodity money gold bugs are living in the past. This is the new
era!
Viva Zimbabwe!!!
concerned observer|10.17.08 @ 5:04PM|#
@PaperMoneyRocks-You lose for being the first to conflate a reasonable monetary policy with Zimbabwe style hyperinflation.
Paul|10.17.08 @ 5:04PM|#
but I cant stand thinking what it would be like if no one
knew exactly what "pound" was. There goes your contract
enforcement. "But you see, I define the pound differently, which is
why I gave you only one tenth of what you define a pound
as."
The market would figure that out. Just like it figures out when you
change that definition (print money). By printing money to expand
the money supply, you're changing the weight of that pound. But
eventually, as the Austrians said, the market figures that
out.
Maybe you could actually learn what Keynes had to say about the
money supply, public spending,
We did. Keynes never imagined stagflation. One of the biggest
failures of his theories. Or didn't you get the memo?
|10.17.08 @ 5:05PM|#
I see a buttload of misconceptions here on the meaning of fiat
money and fractional reserve banking. It's not surprising really
because we've all been educated in an education system run by the
same financial interests that use the fraudulent fractional reserve
and fiat currency system to practically grow money on trees.
Watch this if you really want to understand how the monetary system
works (and how you're getting screwed in the process):
The Money Masters
http://video.google.com/videoplay?docid=-515319560256183936&ei=6OT4SKOPGpXeqAO3l5gC&q=money+masters&hl=en
|10.17.08 @ 5:08PM|#
Concerned Observer, please explain:
"a reasonable monetary policy"
What is this reasonable monetary policy you speak of? The $850
billion bailout that is leaning towards a $5 trillion bailout? Is
that not hyperinflationary?
Paul|10.17.08 @ 5:08PM|#
It wasn't repealed for a time in 1933.
Russ, I constructed the sentence poorly. What I meant is it was
made illegal in 1933, but that illegality wasn't permanent. I can
now own gold. I didn't mean to suggest it was made illegal only
during 1933.
Russ 2000|10.17.08 @ 5:09PM|#
In a PROPERLY-regulated fiat money system, however, there is
a degreee of stability that allows the economy to function
smoothly.
In THEORY you are correct AND in agreement with Rothbard and von
Mises.
In REALITY there has NEVER been a properly-regulated fiat money
system in the history of mankind. One can point to a span of a few
years where fiat money systems existed and were well-regulated, but
the impermanence proves its lack of validity.
While we're at it- you don't seriously think that we should
have multiple systems of weights and measures, do you?
Are you arguing with the pretend libertarian in your head? The
argument for a gold standard is PRECISELY the fact that the entire
world agrees on its weights and measures. A true gold standard
means people agree on payment in "grams of gold" rather than
"dollars of gold".
emac|10.17.08 @ 5:09PM|#
Its bad enough that the US wont join the world and use the
metric system
Yes, it's terrible the Federal Govt has not issued yet another
massive diktat, this time telling us how to measure things. They
have nothing much else on their plate right now.
Maybe you could actually learn what Keynes had to say about the
money supply, public spending, and business cycles. If it doesn't
shatter your comfortably constructed libertarian world.
That would be terrible, wouldn't it? I better not read what this
Keynes guy had to say! Now, where's my copy of Atlas
Shrugged.....
|10.17.08 @ 5:12PM|#
Paul:
Kant, you're not studying your Agrippa. Allow me to quote
myself:...It's ok, I don't read all the comments either. So it's
all good.
Sorry I missed your followup comment, but I wasn't really even
responding to you, but the supply/demand deficient
tards folks who followed you. I just used your
statement as an illustration.
squarooticus|10.17.08 @ 5:13PM|#
concerned observer:
Tacos is right. While it may piss you off to here that the main reason that inequality from the market can be tolerated is that it produces better overall results, that happens to be what most of the rest of humanity thinks, so you better get used to it.
Let me translate so it's more relevant to the current
conversation:
When I was young, on the carpet I wee'd,
I spent all my Sundays getting de-flea'd.
The sofa was always my best scratching post,
and my favourite food was the scraps from the roast.
As I grew up I found all sorts of places to loll,
but the best was always my Mum's fruit bowl.
Now I am bigger and know the house rules,
I make sure I do all this when they are out... the fools!
With apologies to Jane Webb, your response has as much relevance to
my point as this poem does.
squarooticus|10.17.08 @ 5:17PM|#
I still don't see how an increasing population with increasing productivity won't suffer a deflation problem with a pure gold standard.
I have never seen any coherent arguments against deflation of 0.5%
per year (say 1.5% increase in the gold supply combined with a 2.0%
increase in wealth per year), but there are lots and lots of
coherent arguments against the 18% y-o-y M3 inflation we're seeing
now, along with the unpredictability, moral hazard, and temptation
to spend that comes from governments having their hands on the
money spigot.
Paul|10.17.08 @ 5:17PM|#
but the supply/demand deficient tards folks who followed
you.
I know, I've always got this long line of 'em behind me I'm
beginning to think I've got a sign on my back or something.
Sam Grove|10.17.08 @ 5:17PM|#
@Sam Grove-then how come before sttandard weights and
measures were adopted and enforced by governments, people used
competing (and ineffiecent) systems of measurement?
Can you provide a timeline?
I would expect that standards would have come and perhaps were
coming and governments pushed it along. I admit though that I'm not
familiar with the history.
I just remember how after the Tylenol poisoning that the industry
recalled their product and rushed out tamper evident packaging
before the government managed to make it standard.
There are many standards in industry that were arrived at by mutual
consent. I participated in an audio engineering group that
developed an audio polarity standard. The group was composed of
engineers from various companies.
I suggest that the very problems you cite are the reasons that
standards are developed and adopted. Universities could have
established measurement standards.
Paul|10.17.08 @ 5:19PM|#
along with the unpredictability, moral hazard, and
temptation to spend that comes from governments having their hands
on the money spigot.
Like I say, I don't have the answers, I just don't believe that
going back to a gold-standard is going to make the world richer.
Which in the end, is all we're trying to do.
Russ 2000|10.17.08 @ 5:19PM|#
but that illegality wasn't permanent. I can now own
gold.
Only until the government says you can't. If it could happen in
1933, it could happen again.
Paul|10.17.08 @ 5:21PM|#
Oh, concerned:
Just wanted to say this would be a circlejerk if all we
libertarians were all agreeing with eachother. But we're not.
So...
For instance, emacs thinks the government is all bad, Tacos mmmm
thinks it only 98% bad. We're talking lots of clear water between
positions here.
squarooticus|10.17.08 @ 5:21PM|#
I just don't believe that going back to a gold-standard is going to make the world richer. Which in the end, is all we're trying to do.
And what I'm saying is that the world is going to get richer
anyway, but a gold standard will keep the government and rich,
politically well-connected bankers from stealing my wealth. There
is no inherent connection between the two: the widespread
acceptance of fiat currency benefits only the bankers and the
government, at the expense of everyone else.
|10.17.08 @ 5:22PM|#
Concerned observer: If Galt were real, and if I believed in
prayer in any form, the heads of people like you would be on the
top of my kneel-down agenda. I would also ask that Keynes be dug up
and killed again.
As a general aside to all the fiat money-lovers: How is the fed
printing FRNs whenever they FEEL like it any different from the
middle-ages kings coining lower weight coins and then proclaiming
the new coins as equal in value, in order to boost the value of
their private treasury?
concerned observer|10.17.08 @ 5:23PM|#
"Teh Market will figure it out" Right. Since when do you folks refer to any collection of individuals as a single, conscious entity? One that seems to have taken a few dumps where it shouldn't have, no less?
emac|10.17.08 @ 5:25PM|#
I have never seen any coherent arguments against deflation
of 0.5% per year (say 1.5% increase in the gold supply combined
with a 2.0% increase in wealth per year), but there are lots and
lots of coherent arguments against the 18% y-o-y M3 inflation we're
seeing now, along with the unpredictability, moral hazard, and
temptation to spend that comes from governments having their hands
on the money spigot.
Hear, hear, squarooticus. This boogeyman of deflation has become so
absurdly overstated, especially when compared the current criminal
behavior of the Fed and central banks around the world.
Paul|10.17.08 @ 5:26PM|#
the widespread acceptance of fiat currency benefits only the
bankers and the government, at the expense of everyone
else.
What about the argument that the gold-standard was benefitting only
the bankers and the government at the expense of everyone else?
Tacos mmm...|10.17.08 @ 5:26PM|#
So I guess if enslaving you would produce better outcomes overall, you'd be in favor of that, right?
Ridiculous supposition, as enslaving one person produces no
noticable economic effect, and enslaving enough people to make a
noticable economic effect would be detrimental to a large number of
people.
I am certainly aware of the problems of any utilitarian
perspective, such as establishing any metric of happiness and
progress, or causing suffering for a few to benefit the many.
However, in a general sense, I would be reluctant to embrace any
developments that stand a good chance of plunging humanity back
into the dark ages, even if they seemingly increase human liberty.
As I said, I am not an anarchist. I am not willing to sacrifice all
of the trappings of modern civilization for complete freedom.
The people and the market should decide what kind of money or weights & measures or whatever they want, and if the state has any role at all, it should be to protect its citizens against force and fraud and that's all.
The point of establishing weights and measures is protection
against fraud. You're contradicting yourself.
Devaluation means lower prices thus enabling people to buy more with their money, hence the money won't be hidden, it'll be used. People won't stop investing, they'll always want more than deflationary returns.
No, with deflation, your money is worth more next week than this
week, so the incentive is to spend later. With inflation, your
money is worth less next week, so the incentive is to spend
now.
While inviduals may not care much about the minimal deflationary
changes in their petty cash, you can bet that the forces
responsible for moving large amounts of money, where fractions of a
percent can mean millions, do. It's in macroeconomic terms that
deflation does its real damage.
concerned observer|10.17.08 @ 5:26PM|#
@Kant feel Piettsche-So I guess when your mythical libertarian revolution comes, I'll be first up against the wall, right? What happened to free speech? Then again, since most of you "libertarians" are actually conservatives with as much concern for free speech as you do for the economically disadvantaged, its not surprising.
emac|10.17.08 @ 5:28PM|#
Since when do you folks refer to any collection of
individuals as a single, conscious entity?
Since never.
We are the Borg. Prepare to be assimilated. Resistance is
futile.
Tacos mmm...|10.17.08 @ 5:30PM|#
the widespread acceptance of fiat currency benefits only the bankers and the government, at the expense of everyone else.
Ironically enough, the gold standard had the same effect -
benefitting bankers and the government. This was why the populist
William Jennings Bryan made such a big deal of getting rid of it.
Of course, that was more than a hundred years ago, but we've been
there, and the gold standard did little to alleviate the economic
turmoil at the end of the 19th century, and probably did much to
worsen it.
squarooticus|10.17.08 @ 5:32PM|#
What about the argument that the gold-standard was benefitting only the bankers and the government at the expense of everyone else?
Straw man.
Who's making that argument here? I am not William Jennings
Bryan, and AFAIK he's not arguing with you currently.
There have been countless ridiculous, fallacious propositions made
through the course of human history. Just because I propose "X" and
someone else proposes "not X" doesn't mean both are
false.
Paul|10.17.08 @ 5:33PM|#
Teh Market will figure it out" Right.
Concerned: What, exactly, do you think just happened to our
financial system?
The market figured out that these instruments weren't worth
anywhere near what the sellers of these instruments said they were.
Basically, they had a bunch of weights that they told us weighed
'x' amount, the market said "nay nay, sir" and this "paper" (see
where I'm going with this) became valueless.
Again, you can say something is worth something, but just because
you say it is, doesn't mean it is. The market will figure it
out.
Oh right, I forgot, this is a market failure. Again, where you see
market failure, some of us see market success.
Paul|10.17.08 @ 5:36PM|#
It's not a straw man, squarerooticus.
It's merely a look back at history. I merely find it interesting
that the very arguments to put us on the gold standard are
shockingly similar to the arguments to take us off the gold
standard.
I just happen to be mindful of both arguments. I'm trying to come
to conclusions about our monetary system through, not start from a
preconception and defend it. I'm skeptical of both gold standard
and fiat systems, I'm just not convinced which one is better.
Russ 2000|10.17.08 @ 5:37PM|#
I just don't believe that going back to a gold-standard is
going to make the world richer. Which in the end, is all we're
trying to do.
One does not become richer by PAYING interest, one becomes richer
by COLLECTING interest.
Seriously, we become richer by increasing productivity, not by
playing games with numbers and calling it money. I produce item A
and trade it for item B. The value is in the swiftness of the trade
and the items themselves; "money" merely enables indirect trades,
which saves time, which increases productivity.
Indirect trade requires a level of self-regulation - sometimes that
self-regulation takes the form of government, sometimes it takes
the form of trade associations, or consortiums, standards bodies
etc. Once regulation itself becomes bought and sold, it ceases to
serve its intended purpose and redcues productivity. If dirt were
dollars....
(Well we have managed to turn legislation into dollars, and there
is little doubt as to the inflation of both.)
emac|10.17.08 @ 5:38PM|#
The point of establishing weights and measures is protection
against fraud. You're contradicting yourself.
Okay, I was not saying that there should not be established weights
& measures. I am against the state imposing a particular
set of weights & measures on the people. Obviously such
systems do exist - and always will; they are necessary for
commerce. Surely you must believe that a system of weights &
measures can (and does) exist in the absence of a government
mandate. I assume you are not making the tired old argument that if
the state does not do something, then it simply will not ever be
done.
Paul|10.17.08 @ 5:41PM|#
Only until the government says you can't. If it could happen
in 1933, it could happen again.
I agree completely, which is why gold standards make me nervous. Of
course, there's nothing, but nothing stopping the government with
its fiat system from saying "Your currency you have now must be
turned in and we will issue you these new notes, at the rate of
1:100".
Tacos mmm...|10.17.08 @ 5:45PM|#
I suggest that the very problems you cite are the reasons that standards are developed and adopted. Universities could have established measurement standards.
Easily. The issue is not the particular standard - any old rock
will do for a weight standard. The issue is enforcing the
standards, keeping the merchant's thumb off the scale, so to speak.
From a game theory perspective, the incentive to cheat is high, and
without a system to punish cheaters, no standards system will work,
and trade cannot take place. Now, non-governmental systems have
existed that could dispense punishment for unfair trade practices
by means such as reputation. However, I do not find any
sufficiently extensive control mechanism to be substantially
different from goverment, except in its social obligations.
Paul|10.17.08 @ 5:47PM|#
Seriously, we become richer by increasing productivity, not
by playing games with numbers and calling it money. I produce item
A and trade it for item B. The value is in the swiftness of the
trade and the items themselves; "money" merely enables indirect
trades, which saves time, which increases productivity.
I don't think you're going to find a libertarian that will disagree
with you (or squarerooticus) on these points.
One of the core beliefs of libertarians is that wealth is created
through increased productivity and technology. But how does that
translate to buying power? That's where monetary policy tries to
bridge that gap.
We can create desert island analogies all day long (god I remember
those) about coconuts and grass huts, but we live in a complex,
post-industrial economy. I need to be able to walk into any
establishment, put something on the counter which is universally
recognized, and walk away with another good or service.
If every note I receive is worth 'x' ounces and as such can be
redeemed for 'x' ounces of gold, how do we increase wealth without
issuing new notes reducing the 'x' ounces of gold backing said
note?
emac|10.17.08 @ 6:10PM|#
I agree completely, which is why gold standards make me
nervous. Of course, there's nothing, but nothing stopping the
government with its fiat system from saying "Your currency you have
now must be turned in and we will issue you these new notes, at the
rate of 1:100".
But the problem there is the state itself, isn't it Paul? I don't
quite follow how this makes you nervous about the gold standard
though. Are you saying that it is better if the govt steals your
fiat notes as opposed to your gold?
One of the core beliefs of libertarians is that wealth is
created through increased productivity and technology. But how does
that translate to buying power? That's where monetary policy tries
to bridge that gap.
Quite true, I just believe that history shows that money has always
been something scarce, something of value, something that cannot be
tampered with. When this has not been the case, it has not lasted
as money very long. It a govt wants to define its currency as
something of value (as our dollar used to be), fine. If not (and
especially if it can just create money out of nothing), this is
where the problems start.
Just to be safe, in the modern world, we should work toward
eventually getting all govts out of the money business. They simply
do not need to be in it at all, any belief that they do are the
last vestiges of statist brainwashing that we need to extirpate. We
absolutely can have currency (electronic/debit, specie, legitimate
paper receipts, etc) that is sound, universally recognized and not
tied to a government. We must shed the old thinking and open our
eyes to what is possible, and It is absolutely possible in this
complex, post-industrial economy to do this. In fact, eventually, I
believe it is inevitable.
emac|10.17.08 @ 6:13PM|#
Seriously, we become richer by increasing productivity, not
by playing games with numbers and calling it money.
Well said, Russ 2000, well said.
Gotta take the old lady out to dinner, be back later. PLEASE keep
this discussion going, great thread.
Tacos mmm...|10.17.08 @ 6:13PM|#
Surely you must believe that a system of weights & measures can (and does) exist in the absence of a government mandate.
It can. However, enforcement of such a system required coercion,
and any sufficiently large system capable of coercion is
indistinguishable from government except by name. Libertarians are
fond of erroneously drawing a line between "government" and other
spontaneously generated generated institutions when no such line
truly exists. Governments may be dangerous to liberties, but so are
organized religions, merchant guilds and mafias. Give me a
constitional republic over any of these anyday.
|10.17.08 @ 6:17PM|#
Damn, walk away from the thread for a couple hours, and when I
get back you kids have ripped up the pillows, peed in the closets,
and dunked your little brothers head in the toilet.
some of my favorites of the last few hours:
in response to how to stop deflation
"1. Get pan
2. Find River
3. Shake"
so tight monetary policy requires backbreaking, ecologically
damaging effort to to alleviate vs. inconveniencing some electrons.
brilliant. sorry if my humor button is off - I am posting as a
robot after all...
"I have never seen any coherent arguments against deflation of 0.5%
per year (say 1.5% increase in the gold supply combined with a 2.0%
increase in wealth per year), but there are lots and lots of
coherent arguments against the 18% y-o-y M3 inflation we're seeing
now,"
inflation is not = to increase in money supply. excess of the
latter causes the former, but not equal.
"Fiat money kicks ass! Inflation kicks ass!!"
gotta go there. The same people that seem to love deflation of .5%
(for a number) seem to equate 3-5% inflation with hyperinflation.
Zimbabwe has something like 11.2 million % inflation. not a typo or
exaggeration. So, the fed clearly is not zimbabwe - lets all just
calm down on that point.
concerned observer said:
"inequality from the market can be tolerated is that it produces
better overall results,"
hot damn, now that sounds like a libertarian argument. we will
tolerate inequality of outcome because rigging a system so everyone
remains poor and equal is offensive to liberty.
tacos said:
"Ironically enough, the gold standard had the same effect -
benefitting bankers and the government."
right on. perhaps surprisingly, under most monetary systems you can
imagine rich people tend to have a lot of power and benefits.
capital accrues wealth to it's owner regardless of weather its
paper or gold backed. I think i'm ok with that as a libertarian
too.
squarooticus|10.17.08 @ 6:21PM|#
Sorry, I misspoke several times: when I say "gold standard", I actually mean "free-market money" or "honest money". I don't actually want the government in the currency business, but "gold standard" rolls off the tongue, however inappropriately.
|10.17.08 @ 6:28PM|#
TallDave & Co.:
You have your opinions, I have mine.
I've been busy exchanging the paper money you love, for the yellow
metal you disparage.
The experiment is on. We shall see who is right.
squarooticus|10.17.08 @ 6:29PM|#
domoarrigato:
The same people that seem to love deflation of .5% (for a number) seem to equate 3-5% inflation with hyperinflation.
We do not have 3-5% inflation. Inflation is defined as an increase
in the money supply. As best as we can tell, we've been running
around 7-10% inflation over the past 5 years, and are running
somewhere between 15% and 50% y-o-y for the past year.
what you are referring to is an increase in consumer
prices---misleadingly called "consumer price inflation"---resulting
from each dollar being worth less, something that eventually always
follows actual inflation. (More dollars chasing the same number of
goods => goods command more dollars.) The process takes time,
however, because the increase in the supply of dollars chasing
consumer goods requires those dollars to get from the bankers to
Joe Sixpack first. Rest assured, we will get plenty of consumer
price inflation over the next several years.
|10.17.08 @ 6:32PM|#
by the way, there is nothing stopping any gold standard advocate or even sound money worry wart from buying gold and holding their savings in a safe deposit box or or other suitable location. if you are worried about devaluation of the dollar and other fiat currencies, you can absolutely do so. in fact if you did so a few years ago, you would have done pretty well. I personally will not, because I don't believe that gold is any better suited to storing the value of my capital than other investments. that's my view. But I will say that everyone on this thread that truely truely believes that dollars are unsound as money should be able to say they own at least some physical gold other than jewelry - if not, you are kind of voting against your own proposition in the market place of ideas. anyone? I'm really curious about this one.
Frenso Bob|10.17.08 @ 6:45PM|#
It seems to me, that what's happening right now, is the price of assets and commodities of all sorts are falling while the dollar is looking relatively strong. This doesn't look like inflation to me. Am I missing something important, or am I just crazy?
|10.17.08 @ 6:48PM|#
"Inflation is defined as an increase in the money supply."
you can define any variable you like, any way you like - but no one
seriously uses that definition. you are saying that monetary supply
as defined by M1 or M2 (maybe?) expanded 7-10%. 15-50% - I have no
idea where you get that from. really I don't.
"what you are referring to is an increase in consumer
prices---misleadingly called 'consumer price inflation'"
No, actually that is the definition that is used in all the
literature. We could have an argument whether we should use CPI,
PCE, or GDP deflator, but then we would be quibbling.
"resulting from each dollar being worth less, something that
eventually always follows actual inflation. (More dollars chasing
the same number of goods => goods command more dollars.)"
you, of course, are quite right that more dollars means higher
prices all other things being held equal.
"Rest assured, we will get plenty of consumer price inflation over
the next several years."
The problem is that all other things never are equal. I view this
conclusion as totally unwarranted based on your argument, and
highly unlikely. I do worry that we will get inflation down the
road, which is why I own TIPS. But despite my concern, it is very
very easy for the fed to remove the money from the system once it's
replaced by credit. if they do the right thing in 12 months by
taking it back - ill be out of those TIPS and on to better
investments in a heartbeat.
My point: you simply cannot simplify inflation to be increase in
money - there are too many other variables in real life.
Russ 2000|10.17.08 @ 6:53PM|#
One of the core beliefs of libertarians is that wealth is
created through increased productivity and technology. But how does
that translate to buying power? That's where monetary policy tries
to bridge that gap.
Productivity translates to buying power by supply and demand, there
is no gap. If you supply what nobody wants, your productivity is
zero and your purchasing power is zero. Your relative purchasing
power is directly proportional to your relative productivity.
MOnetary policy is an abstraction, not a bridge.
|10.17.08 @ 7:08PM|#
Russ - you are right in the long term, and wrong in the short term. monetary policy affects purchasing power in the short term, until equilibrium is achieved. You don't need to be a keynesian to believe that either.
Paul|10.17.08 @ 7:10PM|#
Russ 2000,
Understood. But the money that provides the abstraction (if you
will) closes the gap between trading widgets, eggs and pigs for a
living, and a universally accepted tender that can purchase any
good in short order.
I mean, gold standard or no, if we don't want a barter system of
goods, what then are we to barter?
I think you and I both understand productivity and its relation to
supply and demand. But we're not living in a bazaar trading silk,
pigs and dried fish. Our purchasing power comes from legal tender--
which we receive in increasing amounts based on our increasing
productivity.
Help me understand your position on this.
|10.17.08 @ 7:15PM|#
RE: deflation. The reason we are experiencing deflation right now is that people are scared and holding their dollars. Velocity of money is super low. There are Trillions of dollars out there that are just waiting to be spent. When they are, expect a tsunami of inflation.
Paul|10.17.08 @ 7:23PM|#
I see it like this:
With increased productivity, we have an increasing number of goods
with a "stable" number of oz. of gold chasing this increasing
number of goods. How is this problem solved?
|10.17.08 @ 7:27PM|#
Wildboar. What you say is true, except for the last sentence. That is true, only conditionally on the Fed not removing money from the system appropriately. I think this is highly unlikely. Incidentally, a very recent change at the Fed (paying interest on overnight deposits) is a very positive development that will help prevent that. I believe the Fed will take a lot of that extra cash back out of the system - but just in case they don't I own TIPS.
Sam Grove|10.17.08 @ 7:41PM|#
The issue is enforcing the standards,
I can assure you that international traders worked out this problem
a long time ago.
Really. Otherwise there would've been no spice trade.
Standards do translate.
Russ 2000|10.17.08 @ 7:46PM|#
Russ - you are right in the long term, and wrong in the
short term.
No, I am right in every time length unless you are only talking
chattel (and even then I am closer to correct than you). Purchasing
power = productivity + assets. If I am given a longer time frame
over which to obtain clear title to a purchase, I still have to
have some kind of collateral to get the credit - the less
colalteral the higher the price (interest rate). Higher interest
rate = lower purchasing power.
Russ 2000|10.17.08 @ 7:56PM|#
Our purchasing power comes from legal tender-- which we
receive in increasing amounts based on our increasing
productivity.
All people need is a manageable set of instruments they agree upon
as money. If I don't have cash to complete a transaction, you
either have to take my assets as payment or I have to liquidate my
assets for cash. This is what every person does every single day of
the lives without thinking about it. But it isn't confusing or
difficult when the assets are liquid enough.
I guess I don't quite follow what you mean by "monetary policy" if
we disagree on something - it is a vague term. In practical
matters, what people call "monetary policy" is in fact credit
policy or leverage policy.
Sam Grove|10.17.08 @ 7:57PM|#
Governments may be dangerous to liberties, but so are
organized religions
Only when they have access to political power.
merchant guilds
Likewise
and mafias.
Really now, the 'mafia' exists because of certain government
prohibitions.
|10.17.08 @ 8:07PM|#
Russ, I think we must be talking at cross purposes. When I say
purchasing power, I mean the amount of goods I can get for my
wealth (however it is stored) + credit. Inflation reduces my
purchasing power as prices rise. I was saying that in practice
prices don't rise instantaneously as new currency gets created - it
takes a while for the money to move out and dilute purchasing power
- like ripples in an ocean (or a tsunami, if you are in Zimbabwe).
Whoever gets the new money soonest has some marginal benefit.
What are you saying with regard to productivity - how are you
defining it, and why does it belong in that equation where you put
it?
|10.17.08 @ 8:15PM|#
"In practical matters, what people call "monetary policy" is in
fact credit policy or leverage policy."
I'm glad you brought this up - its a subtle point, and you are
correct. Monetary policy is a credit policy - but only because
money is a form of credit. Anytime I accept money - of any kind -
instead of the goods I really want, it's because of the belief that
I will be able to use the money in the future to obtain those
goods. I am extending you credit by accepting money instead of
goods. Think of it as a societal compact of exchange - we all
extend credit to each other by agreeing to use a common currency.
The abundance of currency relative to population, goods, etc. is
the monetary policy. leverage is something else entirely - perhaps
you are referring to the reserve ratio in a fractional banking
system.
Russ 2000|10.17.08 @ 8:57PM|#
it is very very easy for the fed to remove the money from
the system once it's replaced by credit.
Huh? The fed reduces credit as soon as more credit is created? Why
would anyone create credit if they knew credit was going to be
yanked? IOW, why write a loan for 6% today when tomorrow the supply
of credit shrinks and the same credit risk is then worth 7%.
I mean, I have no probem with someone advocating the status quo,
the fed can save gobs of wasted productivity by doing nothing.
BlackMinorcaPullets|10.17.08 @ 9:02PM|#
Milton Friedman did not profess "Fiat" money.
His program included a plan to increase the money supply in line
with GDP - no inflation and no deflation.
|10.17.08 @ 9:08PM|#
My decision to stop reading the print version of this magazine is constantly confirmed each time I click on a link which leads to this blog. Thank God for Liberty.
Russ 2000|10.17.08 @ 9:28PM|#
Inflation reduces my purchasing power as prices
rise.
That depends on where the inflation begins. If the new money is
injected at the bank level, you are correct. If instead the new
money is injected by the government printing cash and driving it to
your house as a gift (a real stimulus package!) YOU benefit because
you can react to the new money before others can.
|10.17.08 @ 9:29PM|#
The important thing is to separate an opposition to fiat money from a gold standard or other idiotic systems that tie the medium of exchange to something you maybe dig out of the ground if you can find it. It is a *fact* that so long as the population of workers grows and resources are discovered the economy is expanding and it is necessary to represent that increased wealth with currency. If you have an inflexible standard like gold you get deflation and the house you are contractually obligated to pay $2,000 a month to keep is now worth only $1,500 a month using the newly deflated currency. No one can borrow, there is no liquidity and everything comes down like a house of cards. The right answer is a totally free currency market and with no central banks and full disclosure. Let the market set the money supply with no interference from a Federal Reserve.
|10.17.08 @ 9:30PM|#
Ok, so the fed removes cash from the banking system by raising rates - making credit more expensive. The fed withdraws its credit, when banks start creating credit by themselves. It lowers the quantity of money to make borrowing more expensive to prevent excessive credit creation. the fed can't tell banks to stop making loans - only make it pricier. this raises the hurdle - so to speak. if the borrowing cost for banks is 2%, they will make any loan that they can charge more than 2%. as a borrower, if I have a project that is only going to get me 4%, I would borrow money at, say, 2.5% to do that, but not if the banks cost is 6%, and they want to charge me 7%.
|10.17.08 @ 9:32PM|#
"...injected by the government printing cash and driving it to
your house as a gift..."
right - we agree on that.
|10.17.08 @ 9:36PM|#
Value exists only in the imagination of the mind and is
fundamental to all things economic. you cannot differentiate
quality of value because of the assets it is ascribed to in the
marketplace. It is what it is. This means the value that is
ascribed to a piece of paper with featuring George Washington's
image is exactly the same value ascribed to gold or to a barrel of
oil. Assets do not define value but value defines assets. Things
become assets value is ascribed to it in the marketplace This means
that money is equal to any other assets were value ascribed to it
is the same value ascribed any other asset.
The true definition of money is that it is simply a notation of
pure value. John Maynard Keynes had one thing right when he called
gold the barbaric metal. To be able to buy or sell instantaneously
around the world in units of value unattached to anything tangible
is a reflection of civilized advancements in rule of law and
confidence in commercial institutions.
One more thing, there is no such thing as intrinsic value. Science
has yet to discover any attributes peculiar to value in matter. The
underlying problem of today's economic theories is that hidden,
instinctive and automatic assumption that value is automatically
inherent in assets.
Nor is there such a thing as fiat value -- it's all imagination
Tacos mmm...|10.17.08 @ 9:38PM|#
If you have an inflexible standard like gold you get deflation and the house you are contractually obligated to pay $2,000 a month to keep is now worth only $1,500 a month using the newly deflated currency. No one can borrow, there is no liquidity and everything comes down like a house of cards. The right answer is a totally free currency market and with no central banks and full disclosure. Let the market set the money supply with no interference from a Federal Reserve.
Indeed. Which makes me wonder why Austrian economists are stuck on
the gold standard, since they accept that deflation due to
contraction of the money supply is bad for economies (as opposed to
deflation due to a drop in prices from increased efficiency, which
is good).
|10.17.08 @ 9:43PM|#
I like gold, but this particular financial crisis was caused by
a government policy--the Community Reinvestment Act Program (or
CRAP, for easy memory) not monetary standards.
Created in 1977 by Carter, expanded by Clinton in 1993 and 1999
with Barney Frank, Maxine Waters and Chris Dodd and supported by
Compassionate Conservative George W. Bush, CRAP went beyond fiat
currency directly to giving houses away to unqualified
"owners."
Literally TRILLIONS of dollars (fiat or not) were loaned to people
who could not make the payments and then those bad loans were
packaged and sold as "securities" that simply "could not lose
value" because the government backed the bad loans and would pay if
they failed.
When you are dealing with TRILLIONS of dollars, no government
guarantee can possibly make good when prices go down and bills come
due.
CRA is bad policy no matter how you cut it. If we were operating
under a gold standard and still made unsecured loans in this
manner, the system would still fall in.
Apparently, this kind of boom/bust cycle has happened six times
since the Civil War -- and we were on the Gold Standard during that
time.
Bad policy leading to massive bubbles in the name of bad risk
people who "deserve" the American Dream has nothing to do with the
money system, seems to me.
Irrational price inflation is strictly a function of the "greater
fool" monetary theory: keep selling the same thing until the price
cannot go up any further.
What's sad is that one party can create a policy that doesn't blow
up for 15-30 years, when the authors are long gone. Whoever is in
office when it all falls in is left holding the bag.
And if you think this CRAP crisis is bad, just wait until Medicare
and Social Security (not to mention the proposed universal
healthcare) blow up....
|10.17.08 @ 9:43PM|#
Bottom line, Gold and Silver should be allowed to freely circulate in the economy. Banks should be allowed to issue gold and silver coins. This would be private money. Why on earth do we want government to have a monopoly on money?? People should be free to choose. The FED and Fiat money would still be around, but now people would have a choice. The value of gold and silver would be set daily by world markets. It's called Free Market Money!
|10.17.08 @ 9:54PM|#
"Let the market set the money supply with no interference from a
Federal Reserve."
Philip - I'm a fan of the Fed, and a fan of Bernanke's - but I
agree in principle with this statement. Actually I think Bernanke
would too. Specifically, he favors a specific rule based inflation
targeting scheme for setting monetary policy. This is not equal to
"no fed," but is pretty close, since the fed's job could
essentially be done by a calculator. But setting policy is not the
only job of a central bank. I've said from the start that any
fractional reserve system is prone to occasional credit
contractions - like we have now. This is not the end of the world,
but it does require us to have a lender of last resort.
|10.17.08 @ 10:00PM|#
Koblog - im with you, but William R, I have to point out that no one is preventing alternative moneys from arising. E-gold is one. Paypal is actually another. They create liquidity. If none of the existing schemes suits your fancy - make a new one!
|10.17.08 @ 10:22PM|#
liberty dollars? really? I guess the thread is kind of dead. Ah well, emac, I tried to keep her running for you.
|10.17.08 @ 10:23PM|#
WilliamR: I think the Reason crowd would show a little more concern about the gold standard if the gold standard supporters could somehow tie the issue marijuana legalization or gay marriage.
|10.17.08 @ 10:25PM|#
Federal Reserve Notes ARE backed by a heavy metal: lead!
It says that any debt can be paid with these notes, a US business
cannot refuse to take them in payment. This is what Ron Paul
proposes, thinking that a real, constitutional dollar will push the
fiat money to the curb.
Tom deSabla|10.17.08 @ 10:39PM|#
"Sigh. Fiat currency is not going away.
This just makes libertarian ideas look silly by association."
Which idiot Dave is this?
Weigel?
Nalle?
Or somebody else equally as stupid?
This statement has been proven false LITERALLY THOUSANDS OF TIMES
ALREADY.
FIAT MONEY ALWAYS GOES AWAY.
EVERY TIME.
NO FIAT CURRENCY HAS EVER LASTED SO MUCH AS A HUNDRED YEARS. EVERY
ONE OF THE THOUSANDS THAT HAVE COME ALONG HAS GONE AWAY.
GOLD AND SILVER HAS ALWAYS REMAINED GOOD MONEY, AND ALWAYS
WILL.
Please, whoever you are, try to curb your stupidity.
Reason is trying not to suck; please do not kill the baby in its
crib.
|10.17.08 @ 10:46PM|#
I find the argument that the gold standard will prevent needless wars and imperialism laughable. People who advocate that willfully turn a blind eye to the history of Spanish Conquistadors.
Russ 2000|10.17.08 @ 10:58PM|#
the fed can't tell banks to stop making loans - only make it
pricier.
Or cheaper.
Think of what Greenspan did: while the economy was creating gobs of
credit on its own, he lowered the fed rate. Is there any common
sense in thinking "Prices are low, there must be a need for more
supply"?
|10.17.08 @ 11:12PM|#
Russ, yup, mistakes were made. but you know what - we had the
longest continuous economic expansion in history. in the gold
standard era, we had recessions ever few years. They were induced
by unintentional and unavoidable tightness of money caused by
inflexible currency supply. Fiat money isn't perfect, is just
better than the alternative.
Tom - then buy gold and tell you wacko survivalist radio listeners
to do the same. Your right - gold and silver will retain value and
stay good money over time. It's still not better as a national
system than the one we have now - and it would not prevent bubbles
and credit crises, let alone wars, imperialism, priapism or
dandruff. Reason doesn't suck precisely because it can be taken
seriously by people who don't hoard smokeless powder.
Kolohe|10.17.08 @ 11:13PM|#
I find the argument that the gold standard will prevent
needless wars and imperialism laughable. People who advocate that
willfully turn a blind eye to the history of Spanish
Conquistadors.
For that matter, they turn a blind eye to the more recent Spanish
American War.
economist|10.17.08 @ 11:20PM|#
domoarrigato,
I beg to differ. Gold is a cure for male pattern baldness, obesity,
and body odor. Or, at least, that's how the ladies seem to view it.
(I'm going to get my ass kicked someday)
economist|10.17.08 @ 11:20PM|#
Then again, fiat money also cures those things. US dollars also cure AIDS.
Russ 2000|10.17.08 @ 11:25PM|#
What are you saying with regard to productivity - how are
you defining it, and why does it belong in that equation where you
put it?
To be brief, I am defining productivity as earning power. Perhaps
the arguments are clearer if I say "purchasing power = earning
power + assets" but I meant productivity as a labor component
whereas assets could be a capital investment or a depreciating
asset.
To put it another way, a 64-year old heart surgeon has less earning
power than a 34-year old heart surgeon. But the 64-year old
probably has way more in assets. Both of them could purchase a
$2,000,000 house today but perhaps neither could afford a
$3,000,000 house (the numbers are merely for example, I have no
inkling of what a heart surgeon typically gets paid annually).
|10.17.08 @ 11:26PM|#
Thank god for small miracles. If there is any argument for intrinsic value, it goes something like that. Clearly my devotion to arguing monetary policy is not doing the trick as the fact that my posting are spaced no more than the requisite 10-15 minutes apart should prove...
|10.17.08 @ 11:32PM|#
Domoarrigato and Tacos,
Both of you have no idea what you are talking about. You are both
mostly ignorant about monetary mechanisms.
As an example, this statement:
"... since they accept that deflation due to contraction of the
money supply is bad for economies (as opposed to deflation due to a
drop in prices from increased efficiency, which is
good)."
Which is absolutely false. Austrians actually believe it is good
for the economy.
"Currency is hoarded instead of invested, and capital
decreases"
Errr... currency isn't capital, it's a medium of exchange and a
claim against capital. Hoarding gold actually increases capital.
You have to produce more goods than you consume in order to obtain
the gold. Saving gold frees up that capital for use by other
people.
In order to withhold the gold I have to inject goods into the
market equal in value at current prices to the withheld gold. That
is NOT deflationary at all.
Price levels are determined by the amount of goods vs. the amount
of currency. The hoarder is injecting more goods at the same time
he is withdrawing money. It's a wash.
What is deflationary is using the saved capital in a way that
increases the production of goods. Thus increasing the amount of
goods in the market that the money is being exchanged against. But
the hoarder isn't doing that. That's the job of the
entrepreneur.
Hoarding doesn't stop anyone else from saving gold and then loaning
it out for increased profits, and yes, over and above what can get
by hoarding gold. Of course with increased risk.
Furthermore, it's not called "hoarding" it's called saving. Your
choice of a derogatory term shows quite a bit of bias. You've built
in your economic misconceptions right into your language.
"I have to point out that no one is preventing alternative
moneys from arising."
Errr... yes they are. The way the do it, legal tender laws, were
pointed out in this thread yet you still persist in your ignorant
statements. If they didn't outlaw alternative currencies then
Gresham's law would wipe out the fiat dollar.
"It is a *fact* that so long as the population of workers grows
and resources are discovered the economy is expanding and it is
necessary to represent that increased wealth with
currency."
It's not a *fact*. It's a misconception. A fairly ignorant one. It
shows a complete misunderstanding of prices and money. It reveals a
kind of monetary intrinsicism. There is no "right" quantity of
money.
It's quite apparent all this economic talk is over your heads. You
too "Concerned Observer".
|10.17.08 @ 11:38PM|#
Russ, I don't think your view of credit is a widely shared
one.
I very well might be able to purchase a 15mm dollar asset with no
earning power to pay back the price over time. Why, because the
lender knows that worst case they can repo the asset and liquidate
it, or it will be sold by my estate upon my death. I could be a 60
year old heart surgeon with no assets (my third wife has whats
left...) and still buy a 2mm home because I have the 20% down, and
can service the debt. I have purchasing power that exceeds my
productivity + assets. Likewise, I could be high functioning
alcoholic truck driver who earns about $12/hour. I might win a
chunk of money in atlantic city for a down payment and be able to
service debt payments, but be unable to obtain credit because I
have never done so before, and my history doesn't really make the
lender confident.
My personal balance sheet can expand to whatever size creditors
will allow.
I think productivity is a more useful concept on a macro economic
scale when you are talking about growth, and comparative
advantage.
economist|10.17.08 @ 11:49PM|#
Brian,
You do realize, of course, that CO is a troll (probably Edward) and
therefore cannot be swayed by your puny human logic?
Russ 2000|10.18.08 @ 12:14AM|#
but you know what - we had the longest continuous economic
expansion in history. in the gold standard era, we had recessions
ever few years. They were induced by unintentional and unavoidable
tightness of money caused by inflexible currency supply. Fiat money
isn't perfect, is just better than the alternative.
And the "expansion" is being undone by a severe contraction. I can
make no guess on how long it will last. And I put expansion in
scare quotes because I really don't know what things of value are
being measured and what things of value are being left out. So the
number means practically nothing.
Also, I have made NO statement in this thread picking one monetary
system over the other. The main thing I have against fiat systems
is that it makes money more of an abstract concept, I don't think
people like that. Gold systems have their productivity sinks too,
lengthier transactions being the obvious.
Some want MORE REGULATION! Others want SOUND MONEY! Either way,
there's a whole lot less trust and a whole lot more worry. That
economic expansion ain't buying any peace of mind. We've tried
both, some are old enough to have lived through both. Neither more
regulation nor sounder money will do a damn thing to make people
live within their means. Same as it ever was.
|10.18.08 @ 12:16AM|#
"It's quite apparent all this economic talk is over your
heads."
Not remotely, Brian. A brief rebuttal of the statements I made and
some issues I have with yours:
"Austrians actually believe [deflation] is good for the
economy"
I'm not, er, an Austrian school economist. Nor are most other
serious economists - but to each his own. The problem with
deflation has been adequately explained by others on this
thread.
"currency isn't capital"
I didn't say it was - that might have been someone else - and you
are right here. capital ISN'T currency, it is machines for
production.
"Hoarding gold actually increases capital."
alas this is wrong. Capital is not any goods you inject - it's
means for production. If you sell lemonade for gold, you are not
trading capital for currency.
"In order to withhold the gold I have to inject goods into the
market equal in value at current prices to the withheld gold. That
is NOT deflationary at all."
No one said it was. Population growing combined with real GDP
growth and money supply held constant gives you deflation.
"...over and above what can get by hoarding gold. Of course with
increased risk."
I alluded to this myself in a previous post when I said interest
rates would be high. This is not in and of itself a problem - it's
all relative. But the point was made by Philip Hornsby above that
if I wish to borrow to purchase a house for 2000 oz of gold and
certain deflation means it will be worth only 1500 oz in 10 years -
at what interest rate would I borrow? If I agree to pay interest, I
will be paying deflation as well as interest - very high. Moreover,
if I am charged 0% interest, I still pay deflation. No one would
lend to me at a negative interest rate, because they could do
better by the "mattress savings plan." So then, the deflation rate
acts as a lower bound on real interest rates in the economy.
subsequently, when significant deflation occurs, lending becomes
impossible, and more deflation occurs. It becomes unstable.
"If they didn't outlaw alternative currencies then Gresham's law
would wipe out the fiat dollar."
Hoe-kay... most of the alternative currencies that I can find ran
afoul of anti money laundering laws, and exacerbated the situation
by failing to cooperate as real banks would do. I really do wish
that a reputable company would introduce a real currency
alternative and abide my banking laws and poke some holes in the
dollar - but so far they charge outrageous conversion costs, and
surround themselves with maniac ideology.
"its a fact"
your issue here is answered by the zero interest rate bound
explanation above. I assume you understand why. There is a minimum
increase in money supply that will prevent nominal interest rates
from becoming 0. failing to maintain than can result in deflation
that is then destructive to credit, and difficult to get rid
of.
|10.18.08 @ 12:31AM|#
Russ - most people don't understand how any of it is measured,
and don't care. I do just because I have made a living out of
studying and trading inflation for the last four years. Even so, I
have a lot to learn.
I used to be a gold standard advocate in my 20's - but not since I
really dug into how money and credit works. money as an abstract
concept used to bother me too - until I realized that money is
always and everywhere abstract. Whats more it's not an issue most
people care about.
I am an optimist - The recession is real, and will in no way
destroy the sum total of wealth created during the expansion. I am
also an empiricist - if proven wrong I will humbly admit so. But I
think I won't be.
About living within means - you are so right. We certainly seem to
have lost some fiscal sense of right and wrong. Same as it ever was
indeed.
Russ 2000|10.18.08 @ 12:35AM|#
If you have an inflexible standard like gold you get
deflation and the house you are contractually obligated to pay
$2,000 a month to keep is now worth only $1,500 a month using the
newly deflated currency.
Completely untrue.
With a deflating money, the payment on a loan takes the form of a
percentage of profits. In the case of residential property its
probably something like a binding labor agreement for a specified
term.
Also, you only get deflation with an inflexible standard if
popuation expands. If population decreases, you get inflation.
|10.18.08 @ 12:39AM|#
Russ, a binding labor agreement doesn't help - it's just payment in kind and represents interest. besides, it sounds like serfdom. weird, dude...
Russ 2000|10.18.08 @ 12:48AM|#
The way the do it, legal tender laws, were pointed out in
this thread yet you still persist in your ignorant statements. If
they didn't outlaw alternative currencies then Gresham's law would
wipe out the fiat dollar.
Without getting too pedantic, laws are in the process of wiping out
the fiat dollar in favor of electronic dollars. Try carrying a
$50,000 check onto an airplane - you won't be questioned. Now try
carrying $50,000 in fiat US currency and see what kind of hassles
you get. It's actually easier to carry a roll of kruggerands onto
an airplane.
Russ 2000|10.18.08 @ 1:46AM|#
Russ, a binding labor agreement doesn't help - it's just
payment in kind and represents interest. besides, it sounds like
serfdom. weird, dude....
Absolutely. I have a mortgage, so I gotta earn somehow to pay it
off. So I have a job. It IS serfdom, it's just indirect serfdom.
But it'll be paid off in 6 years, and then I'm free! Free!! Well,
except for the property taxes. So I'm forever indentured to the
state.
|10.18.08 @ 1:49AM|#
Kolohe | October 17, 2008, 11:13pm | #
I find the argument that the gold standard will prevent needless
wars and imperialism laughable. People who advocate that willfully
turn a blind eye to the history of Spanish Conquistadors.
For that matter, they turn a blind eye to the more recent Spanish
American War.
I guess Reason regular Steve Horowitz would disagree with
you.
Free-Market
Money: A Key to Peace
|10.18.08 @ 11:28AM|#
"I'm not, er, an Austrian school economist. Nor are most
other serious economists - but to each his own."
"Serious" economists? Who, like Alan Greenspan, the guy who got us
into this mess? The guy who coined the term "New Economy". You
aren't qualified to judge who is a serious economist.
Alan Greenspan is the guy who put a price ceiling on interest
rates, which is a price control, during his entire term. Meanwhile
next to no serious economists were complaining about this behavior.
The Austrians were.
Here's some economics for you: "Price Controls Bad. Free markets
good." Something the "serious" economists seem to have forgotten in
this particular instance.
If you actually bothered to read what Austrian economic theory has
to say on the subject you'd see that the theory predicts exactly
the outcomes we have been experiencing. Put a ceiling on interest
rates below the market rate and you will experience: Low savings,
over borrowing, a boom, trade deficit, increased commodity prices,
manias, overinvestment in long term projects, etc.
The "unserious" Austrians predicted both the Great Depression and
stagflation. Their theories are also doing a great job modeling
what is happening right now. But you wouldn't know that since you
listen to "serious" economists.
"The problem with deflation has been adequately explained by
others on this thread."
No it hasn't. What has been discussed is a bunch of nonsense. That
"adequate" explanation didn't even cover the differences between
monetary deflation, fractional reserve deflation, and price
deflation. It also failed to cover deflation caused by trade. How
could it possibly have been adequate?
"Hoarding gold actually increases capital."
alas this is wrong. Capital is not any goods you inject - it's
means for production. If you sell lemonade for gold, you are not
trading capital for currency.
Goods are a lot more fungible than you believe. You are in fact
wrong about lemonade. It can act as capital, both by itself,
depending on circumstances, and in combination with other goods,
like all capital products.
For example, I might be in the business of producing lemonade in my
desert village. I might "hoard" the lemonade directly until I have
enough to allow me to cross the desert and back in trading with the
next village over. In that case it is acting as a capital
good.
It can act in combination with other goods also. For instance, I
might save up lemonade, hotdogs, ketchup, etc., enough food to feed
myself for three months. I can then use that saved capital to
proceed on a project. I can use the time I've bought myself with my
saving to, for example, collect fibrous plants in the jungle, beat
that fiber out of the plants, twist together string, and weave a
net. I've just transformed one form of capital into another. Now
with the net I have a means for increased production of fish.
Also, producers always produce more of their product than they ever
consume. What matters is that on the whole they are also not
consuming all the other goods they could be trading for. My
production of lemonade allows others to concentrate and specialize
in the production of other goods.
When I save I'm NOT really postponing my consumption of lemonade
but all the other goods that I would have normally used the gold I
"horded" to trade for.
The market naturally will generate a mix of goods proportionate
with what people are consuming at the time. What the community as a
whole has decided they need to "get them through time".
So what I've saved is not lemonade per se. What I've saved is a
mixture of goods at all stages of production that people need in
order to produce. You've forgotten that people can't live day to
day eating machinery. Food is as valid a component of the capital
structure of an economy as any other good.
That even includes goods you may think are frivolous, but that is a
harder concept to grasp and I don't have the time to waste
explaining it.
"Population growing combined with real GDP growth and money supply
held constant gives you deflation."
It gives you price deflation, which is a good thing. Not the kind
of deflation that gets everyone's undies in a twist, fractional
reserve deflation.
Price deflation over time is just in fact the market prices seeking
the proper level for the amount of money in circulation. There is
nothing wrong with that.
Every good economist should know that prices are the mechanism by
which the market sends signals. Bad economists (and amateurs) are
obsessed with suppressing these signals via price controls.
You show an example of this mindset with this comment:
"I do worry that we will get inflation down the road, which is why I own TIPS. But despite my concern, it is very very easy for the fed to remove the money from the system once it's replaced by credit. if they do the right thing in 12 months by taking it back - ill be out of those TIPS and on to better investments in a heartbeat."
To illustrate why this is silly let's consider if you were talking
about price controls on say a farm product like oranges. You might
have well have stated.
"I do worry that we will get overproduction of oranges down the road, which is why I own Tropicana stock. But despite my concern, it is very very easy for the government to remove the price controls from the system once it's replaced by increased production of oranges. if they do the right thing in 12 months by taking it back - ill be out of those Tropicana stocks and on to better investments in a heartbeat."
It's as if you think the government should be in the business of
determining market prices, and that the screwups caused by price
floors are easily remedied by price ceilings.
The problem with all this is that there are effects outside of what
is obvious to you. That is one of the important lessons of
economics that is stressed by Hazlett. Price floors this year cause
over production of oranges that rot this year, and consume capital
to produce this year. The damage was already done to the market by
the original overpricing of oranges. Lowering prices next year to
below market prices doesn't make up for that. It merely causes
underproduction of oranges given current market conditions. Oranges
should be cheaper because they are now more abundant.
For example, the prior price floor may mean that there are many
more orange groves now than before so market prices should be much
lower than before given the extra production capacity caused. The
market will want to send the signal that there are too many orange
trees planted for normal demand. Merely sending prices back to
where they were will not generate that signal.
There are all sorts of bad effects to lowering interest rates below
market and raising them above market that I am not going to discuss
in detail. I will say that you are totally clueless of these
problems.
What is especially stupid about "serious" economics is that they
actually believe that the cure to price ceilings when it comes to
every other price in the market is to remove those price controls,
however when it comes to the time cost of money, interest rates,
another price in the system, they thing that the answer is more of
the same, or increased levels.
Thus the "serious" economists answer to market disruptions caused
by artificially lowered interest rates is more artificially lowered
interest. As if pumping money into the system increase the actual
level of underlying capital in the system.
Lowering interest rates below market levels has exactly analogous
effects as other price ceilings. If you cap gas prices then you get
lowered production and increased consumption resulting in
shortages. Same thing with low interest rates, less production,
less savings, and increased consumption, more borrowing. You also
get a shortage in true capital. That's the underlying problem and
that is the true reason why fractional reserve deflation is
associated with "bad". Everyone was tricked by the new money into
thinking they were getting rich when in fact the underlying actual
capital, the goods, were not increasing as quickly as the
cash.
Now although interest rates are a price, like any other, there are
some unique things about both money and interest, that make the
behavior of the shortage different. Money is a medium of exchange
and therefore effects all prices. Interest rates are a price signal
about time, about what you are willing to forgo now in order to
consume more in the future, as a saver, vs. what someone else is
willing to pay in the future to consume more now.
Thus interest rates are intimately tied up with time. This is
something that the "serious" economists fail to grasp. They also
fail to grasp the structure of production and that short term goods
like lemonade are just and important to production as long term
ones such as machinery. That mix of goods is determined by the
market, and when you have too much machinery and not enough
lemonade then you get into trouble.
When you lower interest rates you make long term projects appear
more profitable. That sends a signal that OVER TIME causes
problems. Entrepreneurs overinvest in long term capital goods and
underinvest in short term ones. This causes, for example, commodity
prices to rise faster and higher than shorter term goods during the
boom.
I could explain exactly how this unfolds but there are plenty of
places online where you could read about it yourself. So I will not
bother writing any further. It is enough for you to know, at this
point, that you are in fact, despite your belief, extremely
ignorant on the subject of economics.
"I alluded to this myself in a previous post when I said
interest rates would be high. This is not in and of itself a
problem - it's all relative."
Yes, I read that and it's just another misunderstanding you are
suffering from. This is what you wrote:
"With deflation, you get paid to sit on cash - so you need a very high interest rate to induce you to lend it. Deflation pays you to be risk averse and hoard cash - which induces chrinically tight money, and stifles the risky ventures upon whose success technological progress is made."
Which is exactly wrong. If there is deflation you do not, I repeat
do not, need high interest rates at all. You are not only wrong
theoretically but also empirically. Interest rates were very low
under the gold standard. Why on earth would I need higher interest
rates if the underlying asset I am being paid back in is already
increasing in value?
Interest rates have three components that you get paid for by
lending out. 1) Risk 2) The Time Cost of Money 3) Inflation. So
when inflation is high the portion of interest needed to compensate
for inflation needs to be higher. I'm not going to lend you a dime
at 5% interest if the rate of inflation is 10%. You'd be paying me
back with money worth less than what I lent you. Not only wouldn't
you be paying me back less but I would not be paid for the risk
that you wouldn't pay me back at all, nor the benefits I could have
by having my money now vs. the future, the time cost of
money.
So you have things exactly in reverse. In an environment of
monetary deflation lenders are willing to lend for less
interest.
The reason that you are confused, and plenty of economists also, is
because you mistake monetary deflation for fractional reserve
deflation. These are, in fact, two entirely different beasts.
Fractional reserve deflation occurs because of the exposure of an
error introduced into the economy by fractional reserve banking.
When banks borrow from depositors they borrow short term, and when
they lend they lend long term. This scheme, to put it politely,
results in a mis-coordination of plans and a price for interest
below proper market rates. Short term loans and long term loans are
different goods, yet banks sell them as if they are the same good.
It is this mis-coordination that is at the heart of the business
cycle.
When I put money short term in the bank that means I plan to pull
it out short term, for needs like food, clothing, etc. I don't plan
to wait for fifteen years to get my money back.
Not only does fractional reserve banking mis-coordinate different
individuals plans but it also disrupts price signals. It disrupts
interest rate signals and other general price signals throughout
the system. Not only does having the my deposit book make me think
I have short term money that in fact has been lent out, but the
general increase in market activity lures me into believing I'm
making a better income via more money. That is, however an illusion
that over time will become exposed.
Such illusions can be generated in other ways. For example, a
counterfeiter could move into town and start spending money like
mad. Everyone at first would see a business upswing and things
would go just swimmingly. Until it is realized that the actually
underlying goods have not increased as prices rise.
It's the price rise of the boom that lures people into even further
mistakes. The price rises are not even and thus there is an
overproduction of long term capital goods. Too much machinery and
not enough lemonade. It's the price rises that reveal the mistake
and that is when businesses start loosing money. With time, iron is
expensive because so many are bidding it up to make the machinery,
thus the plans that at the start of the boom looked profitable with
low iron prices are no longer profitable. Worse yet the consumers
really weren't interested in future increases in long term
production. They wanted that iron invested not in a long term
capital project like a bridge, but a short term one, like a can to
ship their lemonade in.
Now with the exposure over time of all this misallocation,
malinvestment, and over borrowing the borrowers have trouble making
profits and paying back the loans. Meanwhile the diversion of
capital from short term goods to long means that consumer prices
start to rise ever so slowly, and everyone is a consumer. What do
consumers use to pay for unexpected rises in consumption costs, oh
yeah, short term savings. So they start drawing down those saving
exactly as the debtors are having trouble meeting their
payments.
Ta da, bank runs, and deflation.
The bank runs themselves however are not the cause of the problems
but only the symptom. Nor is the deflation a cause, but a symptom.
There really is a problem with the structure of the economy. Prices
for goods are too high for the actual amount of money that exists.
The actual amount being far lower than what they banks have
inflated on top with notes and bank balances.
With a reserve rate of 50% the amount of money people actually
think they have, the amount circulating is twice the actual amount.
Shifting reserves to 25% increases the amount of cash people
believe they have to four times the actual amount. It is the shift
in reserve levels that causes fractional reserve monetary inflation
and deflation. This is an entirely different creature from the
deflation caused by increased actual production of goods, due to
whatever reason, from increased productivity to increased
population levels.
The less reserves banks hold the less coordinated individual people
long term vs. short term plans are. At 100% reserves the plans are
perfectly coordinated. No short term money is lent out for long
term projects, all long term projects are funded by long term
notes. At a level of 2-4% reserves there is an enormous
mismatch.
Fractional reserve deflation happens to coincide with the exposure
of the fraud inherent in fractional reserve banking. The fraud of
borrowing from your friend Peter promising to pay him back soon
while lending the money to your girlfriend so she can go to college
and pay you back in four years. Then telling Peter the next day you
can't pay him back till your girlfriend pays you back.
That fraud on the economy is more extensive that this simple
example. Everyone has been tricked by the new price structures. The
increased lending at lower interest during the boom fooled people
into making too many houses, fool people into following the
increased wages in carpentry and real estate, fooled lumberjacks,
fooled timber investors, etc.
So this deflation, fractional reserve deflation, is indeed
associated with a bad thing, the exposure of economy wide errors.
That does not however mean that the deflation itself is bad. It is
in fact good. It is in fact the readjustment of money supplies to
proper uninflated levels.
Sure it pains Peter to finally discover that you aren't paying him
back for four years but it is in fact information that he needs to
know to take proper action. If instead you told him, I don't have
the cash today, but see me tomorrow, you would in fact be
compounding his error. He might buy a new bike with what cash he
has expecting your payment the next day to provide him with cash to
meet his rent.
So, in fact, the deflation must be allowed to occur, otherwise the
error will be compounded. Not allowing fractional reserve monetary
inflations to deflate results in first inflation, and then
hyperinflation.
You said in one comment above that you were not expecting
inflation. Well you are exactly wrong. All the actions that the Fed
is taking now to prevent the fractional reserve deflation from
occurring will actually result in fiat money inflation, which will
cause permanent price inflation. Again, each of these things types
of inflation are different beasts, one from another, which you and
others conflate.
Paying out on FDIC insurance is inflationary, bailouts are
inflationary, lowering interest rates is inflationary. All three
are being done.
Furthermore, once the inflation starts the large foreign holdings
of cash flowing back to the US is going to compound the
situation.
All the signals of what is occurring are plain to see. The fall of
socialism because of the Reagan/Thatcher revolution was
deflationary, in a good way, due to increased production by
populations who were oppressed by confiscation of capital. Alan
Greenspan saw the dropping prices and with the knee jerk reaction
of a "serious" economist tried to muffle that market signal by
increasing the money supply, instead of allowing the markets to do
their thing. Furthermore, every time any market errors were
exposed, instead of allowing the market to punish the players, he
bailed them out with fresh cash.
This is what distorted the markets, and lead to the obvious signals
that are expected by correct theory under these circumstances.
Again the exactly wrong thing was done. The opening of foreign
markets in which capital was scarce and labor cheap because of that
was sending a signal to move some capital overseas and reduce labor
wages here in the US. Captialism is fair after all. But Greenspan
took this signal as wrong and tried to muffle it, which in fact
increased the signal beyond what the market would
have produced. He did exactly the wrong thing.
"But the point was made by Philip Hornsby above that if I wish
to borrow to purchase a house for 2000 oz of gold and certain
deflation means it will be worth only 1500 oz in 10 years - at what
interest rate would I borrow?"
You are indeed an intrinsicist. Perhaps it never crossed your mind
but perhaps you shouldn't be borrowing in this case, and the other
guy shouldn't be lending. If the house is worth less than the money
stream then don't borrow.
Sometimes the supply and demand curves just don't cross. Like the
supply curve for Mother Teresa's prostitution services and the
demand curve for having sex with her. There is no correct price for
that.
Of course, your example is just a hypothetical worry accepted by
you, and invented by some piss poor economists. Empirically this
situation doesn't occur with monetary deflation caused by increased
production due to productivity or population increases. People have
always lent gold regardless of this.
You are confusing climate with weather. You don't run inside the
house to get out of global warming but you do to avoid the
rain.
There is decreased lending during fractional reserve deflation,
which would result in your house falling in value, precisely
because it is a storm worthy of heading for shelter. Yet people
still lend and borrow all through these situations. When it makes
sense.
It certainly doesn't make sense for a bank to lend money when it
doesn't have any reserves, to lend during a run on banks. Part of
the problem with the fractional reserve system, especially when
backed by a central bank, is that it coordinates our errors.
Instead of randomly making bad loans, and over lending individually
the increase in money supply provides a strong price signal that
causes everyone to act in the same way at the same time.
Monetary deflation due to having a stable underlying money like
gold does not coordinate errors in this fashion. Which allows
people to make lending and borrowing decisions based more on
personal need than on false profitability. People who borrow money
to buy a house always pay more money back than the house is
"worth". If you borrow at five percent interest you are
already paying double or triple the price of the house in final
payments.
What matters with regard to the transaction is not any
intrinsic value, which doesn't really exist, but relative
value. Does the borrower value the present use of the house over
the future monetary stream, and does the lender value the future
monetary stream over the value of using the cash in the
present.
Whether they trade or not depends on their subjective valuations.
As time passes and as I age and save my future valuation of the
revenue stream to support me while I am too old to work, becomes
relatively more attractive. For a younger person, the immediate
need for shelter may outweigh the increased future cost of
borrowing to provide for that shelter.
So what's the difference if I pay 1% interest for a house in a
deflationary hard currency environment and in the future the house
is "worth" half the payments I made due to deflation, or that I
paid 12% interest in an inflationary environment and ended up with
a house worth half my payments due to inflation. When we adjust and
calculate intrinsic payments, and prices both look like losing
propositions. Meanwhile neither is. Why? Because there was more
value to the buyer than the supposed intrinsic costs.
The whole reason people trade is because of differences in
valuation. If I inherited a book on anatomy from my dad but decided
to become a computer programmer, then the book may have only value
to me as a paper weight or to prop up the leg on my desk. Likewise
some other individual may inherit a book on programming and may be
interested in sculpture. He hates computers and is highly likely to
throw the book out or chuck it in the fireplace for warmth. We both
benefit by trading our books.
Total value in the economy increases as if by magic without any
change in anything intrinsic with either book. The valuation is
subjective and taking advantage of those subjective differences
requires trade.
The reverse trade, if we had each had the other father, does not
make any sense. Therefore it should not happen because it does not
add true value to the economy.
Likewise there are subjective differences in the valuations of the
borrower and the lender in the example that always make it appear
as if the borrower is getting less for his money than he really is.
That will always be the case because the lender is being paid for
subjective values that are invisible, like the risk of not being
paid back, inflation, and the alternative uses he could have made
for his money over those long years it takes to pay it back.
" If I agree to pay interest, I will be paying deflation as
well as interest - very high."
Actually if the situation was as you described it would have to be
due to an imbalance in the economy. Both gold and houses act as a
store of value and you have describe a situation in which the value
of houses as a store of value is not only zero but negative. In
that situation the price of houses on the market should be
immediately dropping. You should thank your lucky stars you can't
get a loan to buy it. Move into a tent (if your government allows
you the freedom) and wait. Especially if you value the money
more.
Besides you assumption that interest will be "very high" is exactly
wrong. Empirically and theoretically you are wrong. The fact that
"serious" economists theories are empirically wrong, are self
contradictory, fail to have functioning mechanics, fail to predict,
and are based on mathematical fallacies never stopped them. So why
should it stop you?
Hell one of them just got the Nobel Prize, just like Arafat. Are
you going to start bombing civilians to promote peace?
" Hoe-kay... most of the alternative currencies that I can find
ran afoul of anti money laundering laws, and exacerbated the
situation by failing to cooperate as real banks would
do."
No most of the alternative currencies ran afoul of Legal Tender
laws. Alternative currencies like gold, and silver.
Money has been demonetized by law. What we are left with is fiat
currency. These other schemes are NOT alternative currencies. They
don't meet the criteria for considering them currencies precisely
because those criteria have been outlawed. The qualities of
precious metals that make them naturally become currencies are not
present in this other schemes. Precious metals are easily divided,
transported, stored, assessed, ownership easily transferred, etc.
Financial instruments backed by gold do NOT have these qualities.
Precious metals themselves no longer have these advantages by
law.
No one ever had to track the increases in the value of their gold
before it was demonetized, by law, when doing transactions. Now
days if I tried you use gold coin to trade for other goods then on
each and every transaction I would need to keep paperwork on how
much the gold went up and down in "value" verses the fiat currency
in order to follow the law. Otherwise I'm charged with a
crime.
Plus, because of legal tender laws anybody can welch on a payment
using the fiat currency at any time. Do you think alternative
products like computers would work in the market if I could sell
you a computer but instead deliver a rock painted to look like
one?
Likewise, your ridiculous belief that these money laundering
charges are anything but a ruse.
"… and surround themselves with maniac ideology."
I guess that depends on perspective doesn't it. To me the idea that
the government is going to allow privately minted coinage, when in
fact it's against the law, is a no brainer. You are quite a dreamer
to think that isn't going to be quashed. I imagine you think it's
nutty for very different reasons. Reasons that to me make you
appear like the nut.
What's nuttier than Keynes' belief that dropping money out of
helicopters could be good for the economy under certain
circumstances? Absolutely loony and yet he was quite serious about
it, along with his comment about us all being dead in the long run.
He was the "serious" economist at one time. Even though actual good
economics had already exposed the fallacies inherent in his
theories before he even constructed them.
That's because they were based known fallacies already being
proposed by laymen. Just print money and everything will be fine.
Yeah, sure. Not when the underlying problem had nothing to do with
"not enough money" and everything to do with "too much
money".
" your issue here is answered by the zero interest rate bound
explanation above. I assume you understand why. There is a minimum
increase in money supply that will prevent nominal interest rates
from becoming 0. failing to maintain than can result in deflation
that is then destructive to credit, and difficult to get rid
of."
No, in actually, the zero interest rate fallacy is just as
embarrassing as Zeno's paradox. It's based on confusing different
types of deflation, having a bad theory of value, not understanding
money, etc.
… and with that I have no more time to explain to you what you do
not understand. Hopefully, you and the others will reflect on your
gaping ignorance, and pick up a book by one of those non-serious
economists you disparage.
Read that Rothbard book I linked to. Skoukens books on the
structure of production are also must have reading if you are to
understand how micro and macro economics are really one unified
whole, and not some mystery.
The reason why "serious" economists still teach in terms of macro
and micro is precisely because their theories are not self
consistent, nor universal in scope. It's as if biology didn't work
by chemistry, and organic chemistry was ruled out as a possible
topic. Austrian economics doesn't suffer from such problems because
its theories are both reductionist, emergent, self consistent, and
universal. Just like biochem, chemistry, and biology are.
Current "serious" economics suffers from a discontinuity. If
microeconomics were analogized to chemistry, and macro to biology
then the serious economists would be claiming that biology didn't
run on chemistry. No. They would be claiming mysterious theories
like Vitalism. They'd be claiming a sickness caused by overeating,
was caused by a lack of vitality and trying to stuff the patient
full of more food to increase his vitality. After all, living
things contain vitality. Just like serious economists are trying at
this very moment to stuff more money into a patient that suffers
from too much money, too fast.
Witchdoctory it is.
|10.18.08 @ 1:03PM|#
The fed does not move money around for criminals - it moves
money around for banks.
What's the difference?
|10.18.08 @ 1:07PM|#
Paper money used to have value because it could be redeemed for
gold or silver. The only reason paper money in any country has any
value now is because it can be used to pay the taxes levied by the
ruling regime.
Using gold for money may have some disadvantages, but they pale in
comparison to the twin problems of runaway inflation possible under
a paper standard, and the inevitable collapse of the ruling regime,
after which the paper reverts to its inherent value as paper, plus
perhaps some historical curiosity premium.
|10.18.08 @ 1:23PM|#
Brian -- great comment. You ought to clean it up and send it to Lew Rockwell as an article. Just take out the part about Mother Theresa first.
|10.18.08 @ 1:38PM|#
Craig,
Sorry, I'm doing yard work now. Closing my pool, blowing air into
my sprinkler lines, etc. Plus I've got some volunteer work to deal
with this month.
It's too much hard work to translate a comment response into a
stand alone article that makes sense. I can crank out a comment
like this real fast, especially if I don't bother to
proofread.
Besides I don't like Mother Theresa that much. ;) Did you ever read
Christopher Hitchens on her?
economist|10.18.08 @ 7:12PM|#
Brian Macker,
I agree with you but, crap, dude, do you think you could have been
more brief?
economist|10.18.08 @ 7:17PM|#
You know,the whole Alan Greenspan story is really damn ironic. In a kind of sad way. He's like that one scientist in Atlas Shrugged. Not Ferris, the intelligent one who ends up killing himself. Yes, CO, I actually referenced it. Make your jerkoff post now.
Sam Grove|10.18.08 @ 8:20PM|#
Thanks for putting that out there.
Funny how economists are considered "serious" because they are able
to recommend either expanding credit/money or contracting same,
much as foreign policy pundits are considered "serious" because
they are willing to call for killing people in far off lands.
___________________
Money is funny. Money is a function.
When someone borrows to start a business or work on an invention,
what they are doing is arranging to handle costs, like eating,
until they are able to generate enough income to cover operating
costs and pay back lenders.
Even with a gold standard (which is not required, making it a
standard, that is) there is no reason to suppose that extension of
credit must thereby disappear.
Also, with deflation due to productivity increases, it takes less
gold to buy stuff, so all that has to be done to extend the
function of gold as money is to divide it down to smaller
denominations or use less valuable substitutes.
The way to get around the deflation problem regarding the house is
to buy it for a weight in gold. If the house retains its value,
then you will get the same quantity of gold back when you sell. If
it has increased in value, you will get more.
The reason fiat currency fools us is that people tend to forget
that it is a floating rather than an absolute reference.
Think gold has gone up in price? Certainly, but has it gone up in
value?
The value question is: what you can buy with it? Link
It is unfortunate that mercantilism has left us a legacy that gold
is wealth.
True wealth in the modern market lies in the ability to produce
value.
|10.18.08 @ 8:39PM|#
emac:
"I just believe that history shows that money has always been
something scarce, something of value, something that cannot be
tampered with. When this has not been the case, it has not lasted
as money very long. It a govt wants to define its currency as
something of value (as our dollar used to be), fine. If not (and
especially if it can just create money out of nothing), this is
where the problems start.
Just to be safe, in the modern world, we should work toward
eventually getting all govts out of the money business. They simply
do not need to be in it at all, any belief that they do are the
last vestiges of statist brainwashing that we need to extirpate. We
absolutely can have currency (electronic/debit, specie, legitimate
paper receipts, etc) that is sound, universally recognized and not
tied to a government. We must shed the old thinking and open our
eyes to what is possible, and It is absolutely possible in this
complex, post-industrial economy to do this. In fact, eventually, I
believe it is inevitable.
"
I'm sorry, I have nothing to add, I just liked that so much I
wanted to see it twice!
|10.19.08 @ 8:26AM|#
I agree with you but, crap, dude, do you think you could
have been more brief?
There are reasons I'm not brief that I won't get into for brevities
sake.
Write your own comment if you have the time to do better.
I did not cover every aspect of the myth that hoarding money is bad
for the economy. So it could have been a lot longer.
I could have covered what actually is happening if many people are
hoarding money and the quite good effects of that. I'd point out
that someone must be buying something and if the majority are in
fact consuming less then they must be buying something that
furthers future consumption.
emac|10.19.08 @ 10:41AM|#
I'm sorry, I have nothing to add, I just liked that so much
I wanted to see it twice!
Wow, thanks JTK. If there is one issue I am passionate about it is
exposing the fraud that is central banking and fiat money, which is
so crucial and relavant to everything going on in the world. You
cannot have those and have liberty at the same time. Libertarians
need to realize this, and realize it soon.
There are others that have made practical arguments for hard money
on this thread (like Brian Macker's outstanding comment above), but
to me it is more a moral issue: whatever (usually fallacious)
"problems" one sees with commodity money vs. their ideal
theoretical fiat system, it still does not justify the very
un-libertarian real-world effects that fiat currency has. We are
going to see these effects fully exposed in the coming years, and
it is up to people like us that know better to educate others and
eventually comprise the vanguard of a push for a new, honest
monetary system out of the ashes of the old one.
|10.19.08 @ 6:39PM|#
When I said "I did not cover every aspect of the myth that
hoarding money is bad for the economy. So it could have been a lot
longer." I was also thinking about something Sam Grove pointed out.
What he says here is precisely correct and bears repeating.
"Devaluation means lower prices thus enabling people to buy more with their money, hence the money won't be hidden, it'll be used. People won't stop investing, they'll always want more than deflationary returns.
There is no way that people will stop consuming because their money is increasing in value. They'll consume more. When money increases in value it's equivalent to having more money."
The counter-argument he was addressing fails to take into account
why people save the gold. It's NOT to hold it till they are dead.
They just want to have cash on hand for future consumption. 1) Had
the prices been lower at the outset they may have consumed more in
the first place. So the lowering of prices is going to trigger that
decision. 2) Future consumption is important in and of itself. The
theorist is in no position to decide that saving for future
consumption is neccesarily bad and therefore should be labeled with
the derogitory term, "hoarding".
I also think it is very important that the poor, the less than
intelligent, the old, are allowed the option of a 100% safe
investment, like holding hard currency during a deflation driven by
productivity increases, or population growth.
If you are stupid it's easy to imitate others and save hard money
for a rainy day. You get to participate average increases in
productivity without risk. No decision making required.
If you are very old and living off your savings then your rate of
return matters much less than safety because of the short time
horizon. Over the short span of an average retirement a difference
in return between 4% and 8% isn't a big deal. However a drop in
stock, bond, or a bank failure can mean you don't get to eat.
Poor people also get at least some return on their cash holdings.
They get the liquidity they need for emergencies with their cash on
hand, while at the same time not experiencing a drop in
value.
It's much much harder to pick the right bank, stock or bond.
At the same time the very fact that the hard money is appreciating
in value is an incentive to save.
Not to mention the valuable fact that it allows savings to occur
outside the prying eyes of greedy politicians.
It's a win, win, win, win, situation.
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