Gold: Always Believe In Your Soul

Investment analyst James Grant of Grant's Interest Rate Observer sings a song in the Wall Street Journal of the once (and future?) money, good ol' gold--it's good as gold! Some of the things he thinks we ought not forget, as he offers some sympathy for the devil paper dollar:

To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.

But we ought not let the thrall in which it has held the world in most of our adult lives blind us:

Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century.

What is more likely to keep its value? That colden, golden metal:

On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies—or, alternatively, paper currencies are depreciating in terms of gold—because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.

But he's careful not to place too much credence in the magic of gold qua gold's value these days--its dizzy price capering could just be the Fed's latest interest-rate engineered bubble expanding:

The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything.

The whole, very long, piece is worth reading. It's framed with a call for the possible life imprisonment of Ben Bernanke and his cronies, always delightful. In between it suggests that the market turn toward huge banks and investment firms going public has been a disaster, and gives, probably inadvertently, some intellectual ammunition for the types who, though they rarely put it this way, seem to think that booms are worth busts--that is, that the groovy unrestricted freedoms of a disciplineless paper money for the United States have ginned up so much paper prosperity (paper that, recall, those who have it can still turn into the true joys of life) that it would be party-pooperish to return to the tighter discipline of gold, even if we suffer little economic spills along the paper trail.

Grant participated in a Reason magazine roundtable, with Ron Paul and Milton Friedman among others, on what we might expect from Bernanke back in November 2006. He didn't expect much good, and he got it!

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  • ||

    Why would gold be any more reflective of the total worth of the economy than any other commodity? Attachment to gold is fundamentally cryptoreligious. Just because it's shiny, doesn't mean it intrinsically valuable.

  • ||

    Here's what I mean: rhodium has average $4100/oz over the past 4 years. But if the economy collapsed and I went out into the countryside and tried to buy food with chips of rhodium, the farmers would say "What's this shit?" Whereas if I gave them gold, they might trade it for food. I admit that's that the truth, but it's completely irrational. There's no intrinsic reason for gold to be more acceptable as a medium of exchange than rhodium. And if I went into the countryside with long hair and a beard, dressed in a coarse robe and screaming "I AM THE PROPHET OF THE LORD, HERE TO LEAD HIS REMNANT THROUGH THE LAST DAYS!", they might give me food, too, and for much the same reason as the gold-because of old stories.

  • tarran||

    Maybe gold is more useful than rhodium to a farmer, hmm?

  • subzero||

    In response to:

    Whereas if I gave them gold, they might trade it for food. I admit that's that the truth, but it's completely irrational.

    Answer:
    Gold become money in the first place through a market process. You have to understand that a lot of information possessed by dispersed individuals about the properties of gold made that happened.

    You say it is irrational, but that's only because you don't have as much information as the sum of the knowledge of all individuals whose decisions led to the adoption of gold as money.

    If you like to investigate this issue further, Hayek is a good start.

  • lorn||

    "What's this shit?"

    If they don't know what it is, how can they assess its value? Everyone knows gold is worth a lot. I could count on one hand the number of people I know who know what rhodium is, let alone its going market rate.

  • D.R.M.||

    "Everyone knows gold is worth a lot."

    Exactly. And everyone knows a million fiat US dollars is worth a lot, too.

    Gold's physical properties and their ability to be put to productive use do not come close to justifying its price per ounce. They do so only very slightly more than the physical properties of a hundred-dollar bill justify its value.

    Gold's sole advantage over paper money is that it's hard to make more of it. That makes it much harder to destroy the myth that supports gold's value than the myth that supports the fiat dollar. But both retain value because people believe in the myth, not because they're useful.

  • ||

    Am i the only one who thinks a 999 trillion ton meteorite made entirely of gold falling on Copenhagen right now would solve much of the stupidity in the world.

  • D.R.M.||

    999 trillion tons of gold works out to, um, (seat of the pants figures) somewhere between a hundred and five hundred times the mass (and thus impact energy) of the asteroid that killed off the dinosaurs.

    So, sure, it'd solve much of the stupidity in the world, but it probably wouldn't leave much intelligence, either.

    Could I recommend something closer to, oh, 160,000 tons? That would match the amount of gold that's been mined in all of history and keep the explosion down to Tunguska levels.

  • ||

    Seconded.

  • EscapedWestOfTheBigMuddy||

    Gold is compact, pretty, easy to work, fairly easy to identify, and hard to destroy (chemically resistant).

    Doubtless these are the properties that contributed to the historical value.

  • ||

    It's also the most malleable metal and the most electrically conductive pure metal. Those properties, and it's chemical inertness makes it quite special.

  • D.R.M.||

    Checking the Rubber Book (12-43), "Electrical Resistivity of Pure Metals", silver and copper clearly outclass gold as electrical conductors. Gold's #3, ahead of #4 aluminum by less than it's behind #2 copper.

  • Ebeneezer Scrooge||

    Yeah, although it's just a teeny bit heavy. But don't let that worry anybody. And its electrical conductivity has been a huge bonus benefit for what, thousands and thousands of years now. Even the ancient Egyptians and Chinese loved their boom boxes.

    Oh wait, something's wrong here.....

    Sorry but the "rationality" of the gold standard has never impressed me as being anything but arbitrary.

  • ||

    It isn't the gold standard, per se, that is important. It is that there is SOME sort of standard for valuation so that valuation is not completely arbitrary. A currency could be commodity based or based on productive capacity or something like that. The thing about gold is that there is a finite and relatively small supply. You can't just go out in your yard and dig it up and suddenly be rich. Personally, I would like to see currency based on some sort of standard that anyone, through hard work and sheer effort, could accumulate or create. Paper money is fine as a medium of exchange, but it has to be tied to SOMETHING so that its value can not be arbitrarily reduced by those manning the printing presses. The Indians used wampum. Effort goes into producing wampum. You could accumulate more of it through sheer effort. I would like to see some sort of modern equivalent to this.

  • Death Panelist||

    You can't just go out in your yard and dig it up and suddenly be rich.

    DON'T TELL ME WHAT I CAN DO IN MY OWN BACK YARD!

  • ||

    You're right. I apologize. Go dig to your heart's content.

  • Old Mexican||

    I admit that's that the truth, but it's completely irrational.

    Welcome to the wonderful world of subjective valuation.

  • ||

    Yeah BOB acts like its completely irrational that a house in Detroit is worth less than the many thousands of dollars of wood, copper, and nails it cost in construction.

    The house is worth exactly what it is worth in the general market of informed buyers with a time preference. If they have no interest, it has little value to anyone. That's not irrationality, BOB.

    You might argue that you think the house is undervalued, but then you'd be buying it wouldn't you?

  • robc||

    Gold can get you laid, rhodium probably cant.

  • Ebeneezer Scrooge||

    You just gotta find the right woman.

  • ||

    You just gotta find the right woman.

    Surprisingly the possession of gold or rhodium has no effect on the ability of a woman to get laid.

  • smartass sob||

    And if I went into the countryside with long hair and a beard, dressed in a coarse robe and screaming "I AM THE PROPHET OF THE LORD, HERE TO LEAD HIS REMNANT THROUGH THE LAST DAYS!", they might give me food, too, and for much the same reason as the gold-because of old stories.

    They might just nail your ass to a cross, too.

  • CatoTheElder||

    "Fundamentally cryptoreligious"?

    Are you saying that the goldbugs are part of a secret religion that worships the yellow metal?

    Cryptoreligious fundamentalists?

    Talk about conspiracy theories!

  • ||

    I've said what I had to say. Seeing as how I view this position as irrational, I certainly didn't expect to change anyone's mind.

  • wayne||

    Bob,

    What is so rational about assigning value to a green piece of paper with $100 written on it. Which is more rational, assigning value to a piece of paper which has a marginal production cost of about $.0000001 and which can be produced in essentially infinite numbers, or assigning value to an ounce of gold which has severe limitations on production and availability?

    I don't necessarily disagree with you about the "arbitrariness" of valuing anything considered money. I part ways with you on the practicality of the issue.

  • ||

    I believe subzero has it nailed when he writes:

    Answer:
    Gold become money in the first place through a market process. You have to understand that a lot of information possessed by dispersed individuals about the properties of gold made that happened.

    You say it is irrational, but that's only because you don't have as much information as the sum of the knowledge of all individuals whose decisions led to the adoption of gold as money.

    If you like to investigate this issue further, Hayek is a good start.


    Gold has several key characteristics that appealed to those multitudes of anonymous informed users over the ages who helped form it into a standard.

    Gold is finite.
    Gold is hard to counterfeit.
    Gold is divisible.
    Gold is portable.
    Gold is highly recognizable.

    Disagree with their considerations and judgments all you wish, BOB, but a standard evolved by countless people behaving rationally in a global market of users with wildly varying individual time preferences over millennia is hardly my definition of 'completely irrational'.

  • 2999||

    This guy doesn't understand the difference between money supply and GDP.

    It is so sad how public schools have failed our children.

  • ||

    Failure of school? Perhaps.

    Failure of conceptual imagination? Definitely.

  • JB||

    Guns & ammo.

    Worth a lot more than gold.

  • ||

    Gold is racist!

    Anyhow Bob, to answer your rather facetious question, the reason why gold is a good money today are all the same reasons why it emerged as the best money in ancient times: it's not perishable, it's got high value by weight, it's easily divisible, and people who won't accept it are very few and far between.

    Besides those qualities, it's useful for many ornamental and industrial purposes.

    -jcr

  • Old Mexican||

    Re: BOB,

    Attachment to gold is fundamentally cryptoreligious. Just because it's shiny, doesn't mean it intrinsically valuable.

    NOTHING is intrinsically valuable - value is subjective. If you do not value gold, I can release you from your burden by giving me your gold. You will not feel any regrets, as long as you keep your beliefs intact.

  • ||

    I don't have any gold. So I'll be glad to give you all of mine.

  • Marc||

    Do you have any rhodium? Better yet, scandium?

  • ||

    How about weapons-grade baloneum? I'm loaded with that.

  • ||

    hahahahahaha

  • andy||

    Phlebotinum!

  • Old Mexican||

    You may have, and don't now about it - any tooth caps?

  • ||

    I think you have to be born before 1969 to have any gold in your teeth...or Mexican....

    oh..

    wait..

    sorry about that.

  • ||

    Attachment to gold is fundamentally cryptoreligious.

    And attachment to paper money isn't?

  • ||

    It's a little more rational. At least with paper money, you're clinging to the biggest pillar around. If the goverment goes, usually everything else does, too.

    But you know, most people just use the stuff, without ever thinking about why it's valuable.

  • Goldbug||

    If the goverment goes, usually everything else does, too.

    Uh... That's why we're getting so distrustful of that pillar: money backed by nothing but confidence in your government is a bad investment when you're getting as distrustful of the government as we are.

    You just keep clinging to that crumbling pillar and take one for the team, OK? the rest of us are off to buy some gold (if we haven't done so already).

  • Ebeneezer Scrooge||

    And like I said, you just keep building up that hord of yours. Because I'm getting my horde ready. I'm very sure you won't be running very fast with your bread basket full of gold.

    Of course, for a fee, you might persuade us to spare you a little longer.

    I really like you gold bugs. You're my insurance when those great pillars finally do come crashing down.

  • ron||

    if you're going to do incredibly lame puns, at least get the horde/hoard spelling right!

  • Ebeneezer Scrooge||

    Okay, next time.

    Barbarians don't have to be able to spell.

  • JB||

    lol. I wouldn't be clinging to gold.

    The first guy that comes with a gun and your gold won't buy you much.

  • ||

    You omit the more likely situation of someone with gold having a gun in his other hand.

  • ||

    Its less rational for the very reason that the government controls its value, and especially in our present state of affairs with looming massive unfunded liabilities, the Federales will be tempted to order Bernanke to keep the presses running so they can massively devalue the dollar in order to pay back the shitton of money theyve borrowed from the rest of the globe (which is precisely why the Chinese will not let the RMBI float, because by pegging it to the dollar, they prevent the US from printing away their debts, but everyone else we lend to is f-ed).

  • EJ||

    just wait until the government makes private gold ownership illegal and confiscates it in order to "stablize the currency"... we've done it before

  • subzero||

    BOB says:
    If the goverment goes, usually everything else does, too.

    Answer:
    Wrong! The value of gold doesn't go. It skyrockets!

  • Ebeneezer Scrooge||

    Which will make it so very easy to recruit my horde, when the time comes.

  • ||


    It's a little more rational. At least with paper money, you're clinging to the biggest pillar around. If the goverment goes, usually everything else does, too.

    gold has been prized for millennia, while other forms have come and gone. who is being irrational again?

  • ||

    The government doesn't have to vanish for its currency to become worthless. Indeed, it's usually government action that causes it to become worthless in the first place and keeps making it more worthless. Read a history book sometime.

  • ||

    Pretty sure both are equally rational. Considering history:

    If the government goes, usually everything else does, too.

    The rationality depends on your time and place.

    One thing that is interesting by this measure i have outlined. Gold rational when the government is unstable money rational when government is stable.

    gold prices can be a proxy to measure the stability of your government. Or at least the perceived stability.

  • ||

    Hold on... Faith in a fiat currency issued by a quasi-private cartel supported by a government that is living farther beyond its means than any other government in history ever has, is MORE rational than valuing gold?

    -jcr

  • ||

    Well put, fellow 'completely irrational' gold valuer!

  • ||

    Compare an ounce of gold, even in a down year, to a paper dollar and see the value of private vs. govt money.

  • ||

    One thing i have never understood.

    Why is inflation anti-liberty?

    I can understand how inflation can be bad policy or a sign of bad policy. But how does inflation limit your liberty?

    Which begs the second question...why the fuck are libertarians so interested in inflation?

  • ||

    Inflation is a hidden tax on dollar savings. It makes it impossible for people to preserve their wealth in cash and pushes them to speculate in asset markets.

    You do think that taxes limit liberty, right?

  • John Berger||

    Because when there is currency variation, you essentially change the medium of exchange unless you live in an barter economy. The argument is essentially against government changing the medium of exchange halfway through the game. Think if you were playing monopoly and all of a sudden the bank decided everything now cost double, but with each player having the same amount of money. even if its arbitrary the players would be annoyed to say the least, it sets everyone back. Now lets say that the banker decided to do it to favor players #1 and #3 at the expense of player #2 and player #4; that action would seriously piss off #2 and #4, because you essentially negated their hard work. Now in real life you not only inflate, but then tax the shit out of #2 and #4, then you blame #2 and #4 for any problems.

  • ||

    I can understand how inflation can be bad policy or a sign of bad policy. But how does inflation limit your liberty?

    Change the word "inflation" to "taxation" or "robbery" in the sentence above, and you should be able to answer your own question.

    -jcr

  • ||

    Not to mention it is the most insidious of all taxes - invisible (from most people's perspective)and harming the poorest the most, the poor and the working class having little option to "hedge" against inflation.

  • ron||

    if you understand the link between LIBERTY and PROPERTY... it's pretty clear.

  • ||

    It's framed with a call for the possible life imprisonment of Ben Bernanke and his cronies, always delightful.

    Cause hangins too good fer em.

  • ||

    At least with paper money, you're clinging to the biggest pillar around.

    Tell it to Wiemar Germany.

  • CatoTheElder||

    I have been buying gold, a couple of coins at a time, for the past thirty years. I haven't sold any.

    I have also collected small denomination currency notes over the same period. About fifteen years ago I got a Brazilian 500,000 novo cruzado note in change. If I could change it back to dollars, it would be worth about $0.0004 today.

    Since gold began its ascent from $300 a few years ago, I have kept that bill on my desk to remind me why one should buy and hold gold.

  • CatoTheElder||

    I suppose I should have noted that the novo cruzado was originally at parity with the dollar.

  • ||

    I suppose I should have noted that the novo cruzado was originally at parity with the dollar.

    This is also a good reason to buy American dollars

  • hmm||

    GOLD BUG ALERT GOLD BUG ALERT!!

    Gotta like gold, silver, soup, guns, arable land, and individually wrapped lead. (the latter still about as scarce as nun fart)

    Where's my tinfoil hat at?

  • juris imprudent||

    I have a suspicion that I could teach a lot of goldbugs the higher value of lead if/when the fecal matter hits the air circulating device.

  • hmm||

    Hell it's worth a fortune now. When Walmart started rationing their sales because shop owners were clearing them out as soon as the ammunition hit the shelf and reselling it at 100% plus mark-up you know it is/was bad.

  • hmm||

    Hell it's worth a fortune now. When Walmart started rationing their sales because shop owners were clearing them out as soon as the ammunition hit the shelf and reselling it at 100% plus mark-up you know it is/was bad.

  • hmm||

    The double post is fucking annoying. Someone beat the IT/web guy and get him to put a timer on spam posting. God knows the spam bot filter for text is in full effect, a timer can't be rocket science.

  • ||

    If the end of shot gun is blasting out steel balls or lead or rocks does it even really matter?

    It would seem gun powder, empty shells, and one of those shell packing devices would have more value.

  • wayne||

    JI, you seem to embrace the mistaken belief that "gold-bugs" can't shoot as well as you.

  • Colin||

    Man, that roundtable with Friedman and Paul was incredible. A must read.

  • ||

    (which is precisely why the Chinese will not let the RMBI float, because by pegging it to the dollar, they prevent the US from printing away their debts, but everyone else we lend to is f-ed)

    Pegging it to the dollar won't save their ass. The feds get to counterfeit money if they want, and then pay bills with those devaluating pieces of paper.

    Saying by fiat that 6+ yuan is worth a dollar doesn't do much good if, to take an extreme example, the worth of the dollar goes to zero.

  • ||

    Exactly, by pegging it to the dollar, they're also making themselve pay more for commodities (most notably, oil) and any non-American imports.

    Additionally, since China has an export-based economy, they're also cheating themselves on all their exports to non-dollar based countries.

    I have to wonder if it's really worth it.

  • ||

    Seems pretty reaosnable to me dude, I like it.

    RT
    www.be-anonymous.bg.tc

  • hmm||

    DRINK bot!

  • Enyap||

    Does it count if reasonable is misspelled?

  • BakedPenguin||

    Too bad the coolest rock star to ever call for a metallic money standard was Sammy Hagar.

  • MNG||

    So you guys are bitching about dropping the gold standard? In 2009?

    The next thing you know you'll be denying something like man caused global warming.

  • ||

    hee hee

  • ||

    gotta give cred for funny, no matter how wrongheaded...

  • Agent Provocateur||

    STFU MNG

  • JB||

    So how much of the warming is 'man caused' and how much is 'woman caused'?

    Man: 2%?
    Woman: 5%?
    Nature 93%?

    You have 0 answers to any of those questions.

  • ||

    MNG, you really should read more of Jim Grant's monetary history, it's fascinating to see how every monetary system has seemed permanent to those living under it, but none have lasted more than 40 or 50 years.

    In 1900 one would have been thought insane for proposing a system of paper currencies backed by nothing. Yet here we are.

  • MNG||

    Maybe I'll check his book out.

  • Pingry||

    And the gold fetishists strike again!

    Alright, so I am ambivalent about the things Mr. Grant has written and said over the years.

    But when you claim that the dollar is "of no intrinsic value," as if gold, or something else were, well, you really can't be taken seriously as the financial guru (more like financial goon!) that you hope to be in the eyes of the public.

    No serious economist would ever seriously entertain the notion of "intrinsic value" because there is no such thing as intrinsic value, period.

    Value, as smart economists know, is determined subjectively at the margin. And value can and does change.

    Indeed, if value were intrinsic, then Karl Marx's Labor Theory of Value would be right. But, of course, Marx was wrong, precisely because labor, like everything else, is valued subjectively at the margin. And the value of labor changes too.

    Anyone who says otherwise is just a poseur masquerading as some amateurish 'financial guru' among an unsuspecting public.

    Ha! Mr. Grant couldn't even make it out of the batter's box, nevermind the technical arguments for why gold really is a barbaric relic.

    --Pingry

  • robc||

    Wrong! Well, okay, you are mostly right, but reach the wrong conclusions. Gold has a higher subjective value than paper with ink on it, outside the faith in the government aspect. Remove the government and gold still has value. As Zimbabwe, Weimer Germany and untold number of other places have demonstrated, faith in government is of fleeting value at best.

  • Pingry||

    Ummm...well, I'm entirely right.

    And when it comes to monetary theory, it's not an issue of whether gold (or pick your favorite metallic standard) has a higher subjective value than "paper with ink on it"

    What matters, of course, in the longrun is the purchasing power of the medium of exchange.

    And in the shortrun, what matters is the Okun gap, which is far more volatile with gold than with a proper monetary policy strategy.

  • Brian Doherty||

    Pingry---Please to point to the accurate data on output and unemployment "with gold" that buttresses this point. And exactly what sort of particular "with gold" monetary policy are you talking about, in operation during which time period?

    Not that anyone's guesses about what any given country's output coulda woulda shoulda been under any given counterfactual circumstance overwhelms the major politico-economic advantage of gold vs. unbacked paper, which is that government's can't make as much of it as they like at will.

  • ||

    What matters, of course, in the longrun is the purchasing power of the medium of exchange.

    You just invalidated your own argument. I can show you any number of examples of paper currency whose value has fallen to zero. Can you show me any time in history when gold has done so?

    -jcr

  • ||

    What matters, of course, in the longrun is the purchasing power of the medium of exchange.

    You just invalidated your own argument.


    Seconded.

  • ||

    "But when you claim that the dollar is "of no intrinsic value," as if gold, or something else were, well, you really can't be taken seriously as the financial guru (more like financial goon!) that you hope to be in the eyes of the public".

    A great deal of concern is often expressed about what "backs" Federal Reserve Notes. Technically, the notes are collateralized by holdings of securities -- mostly those of the United States government. Many people, however, feel that this begs the question. What then "backs" the securities that back the Notes?

    The short answer is nothing. There are no real assets, public or private, that are specifically pledged to collateralize the debt of the government. The government borrows on its "full faith and credit," which is to say that it borrows as long as everyone thinks it is able to service the debt. This means that ultimately nothing backs the money (except the full faith and credit of the government).
    G. Thomas Woodward, Specialist in Macroeconomics, Economics Division. July 31, 1996. Congressional Research Service Library of Congress. CRS Report for Congress, No. 96-672 E


    "...you really can't be taken seriously as the financial guru (more like financial goon!) that you hope to be in the eyes of the public."

  • ||

    It ain't about gold per se'. it's about maintaining a stable value of whatever currency you use for exchange and about governments no being able to arbitrarily depreciate the value of that currency. If you tie your medium of exchange to something tangible but limited, they can't do that. Gold happens to be a good choice.

  • BakedPenguin||

    So you guys are bitching about dropping the gold standard?

    Well, if you'd bothered to read the posts, you'd see that most people were simply looking for a safe haven for their money.

    But since you like hockey stick charts and shit, here's one for you that's probably not made up.

  • ||

    good link... i've seen that over and over again lately, and it still scares the bejesus out of me...

  • Pingry||

    So why do you think think the Fed massively increased the monetary base my friend?

    Perhaps it has something to do with a massive decline in the velocity of money....

    And if they didn't increase M, given a nosedive in V, then Y decreases massively followed by P, and more Y.

    You do understand the quantity theory of money, no?

    This is pretty straightforward stuff.

    So, let me inform everyone of something:

    Monetary policy is not about changes in the money supply in any absolute sense, but rather changes with respect to changes in the demand for money.

    So when the demand for money increased tremendously (and velocity dropped off a cliff) the Fed had to increase the monetary base, otherwise it was pretty obvious that we would be in the next Great Depression, because, well, the Fed of that era didn't increase the monetary base enough...and Friedman and Schwartz castigated them for it.

  • robc||

    So? Ive yet to be convinced that depressions are bad things (in the long run).

  • ||

    should the decrease in velocity not be considered relevant to the overstatement of asset values in a bubble economy? just a guess... but fixing a bubble by trying to re-inflate it seems like economic doom. value is not created by a printing press, and eventually someone has to pay.

  • Agent Provocateur||

    So why do you think think the Fed massively increased the monetary base my friend?

    Offset credit destruction.

  • Murray||

    You do understand the quantity theory of money, no?

    Yes. More importantly, I know it's a poor model.

    The demand side of the money supply is the demand to hold cash balances.

    Persistent inflation fools people into holding lower balances than they otherwise might, and misallocates resources into a bubble. During the bust, the demand to hold cash balances is reexamined, found wanting, and for a time balances are re-accumulated. This is a Good Thing, and doesn't need to be "adjusted for" by our masters running the printing press.

  • ron||

    actually.. you've been fooled. V is an arbitrary variable used to balance the equation which is NEVER empirically measured, whereas there are at least attempts to measure M1, M3, P and X (and Y by implication). It's still statistical rubbish, but at least internally consistant with monetarist theses. V is just fucking made up. But it does fool laymen..

  • Space Fiend||

    M was increased to be lent directly to banks to prop up balance sheets. The vast majority of the increase in M never entered the economy at all, it's sitting in interest-bearing accounts at the Fed and has never come out.

  • ||

    What amazes me about that chart is that the Fed itself is admitting that they've inflated the money by well over 100% in the last couple of months.

    -jcr

  • ||

    "What amazes me about that chart is that the Fed itself is admitting that they've inflated the money by well over 100% in the last couple of months."

    If true, it's inneffectual.

    Look at MULT. Their massive shitstorm of QE has accomplished exactly what? Very very little. They succeeded only in buying a single temporary bump in the MULT line, one that never even eclipsed 1, meaning every dollar of new debt now contributes less than one dollar to GDP. When you do that with trillions, well, you can smell what's coming.

    MULT

    RSBKCRNS

    Those tell you most of what you need to know on the supposed success of the moneychangers.

  • MNG||

    "Well, if you'd bothered to read the posts"

    I find no correlation between reading the posts on H&R and the number of coherent arguments I encounter, hence I skim ;)

  • ||

    well aren't we witty tonight. much better than your typical moonbattery. keep it up!

  • ||

    Gold is actually pretty overvalued at this point in time. Not to mention hard as heck to find.

    Silver is where the action is at now. Especially junk silver for you survivalists out there.

  • MNG||

    Yeah, go Big Silver! Screw Gold! Vote Bryan in 2012!

    "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold!"

  • BakedPenguin||

    The Wizard of Oz was allegedly written about silver crusade.

  • juris imprudent||

    Why because in the book they were silver slippers rather than ruby?

  • MNG||

    I'm probably going to be sorry for asking this, but what's the difference between everyone agreeing green pieces of paper have value and everyone agreeing shiny metal has value? How can one be "better" than the other? Is it just that because of history and such there is more likely widespread and long lasting agreement that the shiny metal is valuable than that the green paper is, as a historical-empirical matter?

  • ||

    the guy who believes in AGW can't find enough evidence to support gold over fiat currency...

  • MNG||

    Again in all seriousness I don't know much about either. I believe in both because it strikes me that people who know a lot about each subject do. Really.

  • Agent Provocateur||

    The shiny metal,with some utility in industrial applications and jewelry,is much scarcer than paper and ink.It is way scacer than bits,bytes, and ledger entries.

  • juris imprudent||

    That does not make it an intrinsically better money.

    Money is nothing but confidence that whatever you hold: pieces of paper, chunks of mineral, records in a database, can be exchanged for the things you want. What makes any form of money a good one is that it tends to be stable (as a store of value) and easy to use. The prime complaint about govt fiat money is that it is too susceptible to inflation.

  • robc||

    Gold has value without government support. Government support historically is short lived.

  • MNG||

    Well that helps me understand why so many libertarians feel this way about this issue. If you don't think much of the government you are not going to like currency whose only value derives from government promises or declaration.

    Again I'm not being snarky, it just makes sociological sense to me.

  • robc||

    Zimbabwe
    Weimar Germany
    on a lesser level
    Italy
    Brazil
    Argentina
    on an even lesser level
    Switerland between 1991 and today.

    Government currencies suck. The fact the dollar has historically outperformed doesnt give me any trust for it to continue to do so in the future.

  • robc||

    Zimbabwe
    Weimar Germany
    on a lesser level
    Italy
    Brazil
    Argentina
    on an even lesser level
    Switerland between 1991 and today.

    Government currencies suck. The fact the dollar has historically outperformed doesnt give me any trust for it to continue to do so in the future.

  • Agent Provocateur||

    If all government currencies suck simultaneously, the world will flock to US dollars.They're backed by a shocking superiority of military power for the foreseeable future.

  • Murray||

    How can one be "better" than the other?

    The supply of one is bounded by market forces, the other is not.

  • ||

    The way Jim Grant puts it is, "human beings are not competent to administer a system of fiat currencies backed by nothing."

    Basically, without any natural brake on the creation of money, the temptation for governments (and in some cases the financial companies that own them) to inflate the money supply is too great.

    I'm no gold bug but I have tremendous respect for its ability to preserve wealth no matter the political or historical turmoil one finds oneself in. Surely there is some lesson to be gleaned from the fact that gold has always held value, while every fiat currency system in history has come to grief.

  • ||

    what's the difference between everyone agreeing green pieces of paper have value and everyone agreeing shiny metal has value?

    The difference is that it's a lot easier to rob you by printing more of the paper than it is to suddenly mine a lot more gold.

    -jcr

  • Warty||

    Because it's hard for people to play games with the value of gold, MNG. It's much easier to play with the value of paper. Come on, you know this.

  • ||

    bullshit. i've been printing gold in my basement for weeks.

  • MNG||

    You know I like to point out all the things I do know, but in all seriousness I don't know shit about this subject. I have no idea what is supposed to be so good about the gold standard. I assume there is nothing intrinsically valuable about metal and paper, social agreement makes them valuable. I imagine proponents of gold mean that historically and comparitively more people value gold hence it is a safer bet?

  • robc||

    See my 10:36 joke post way near the top of the thread. It was a joke, but it does have a serious point. People value gold for aesthetic reasons. That gives it a "value" that paper doesnt have.

  • MNG||

    robc
    I see what you mean (you can make gold into things like vases, you can't do that with paper; and its shiny).

    But I can't help but think that a lot of the value of gold in people's minds is simply inherited from centuries of governments using it as their currency, hence it has the same authority as paper money, just a longer pedigree...

  • robc||

    No, I think the value comes from people liking it as jewelry, nothing to do with historical use as money. As I said way up there, it can get you laid. $'s get you laid from whores. Turn it into gold first, and the target range is wider.

  • BakedPenguin||

    It has aesthetic uses, it also has industrial uses.

  • Warty||

    Maybe. Does it really matter?

    The point is that gold is a relatively stable store of value. Most of us here expect the dollar to be increasingly debased as the government's debt mounts in the coming years.

  • ||

    1. Buy gold.
    2. ???
    3. PROFIT

  • Warty||

    2a. find conquistadors
    2b. BLOOD ORGY

  • ||

    Or (highly unlikely):

    2c. Discover the Philosopher's Stone

  • hmm||

    Golds greatest value is that it is intrinsically finite, there's only so much on this rock and you have a pretty good chance of estimating future increases. Which means the currency pegged to gold is finite. If the currency is finite it will not inflate or deflate (in an absolute sense, it can do both relative to other thing) in value.

  • juris imprudent||

    So think about that. The money supply is relatively fixed. So growth will require the monetary velocity to increase, or the static nature of the supply will retard growth.

  • ||

    Are you implying that using gold as the de facto currency will make true the idea of a "zero-sum game" economy, for the reasons you put forth?

  • ||

    I have no idea what is supposed to be so good about the gold standard.

    How about a history lesson?

    -jcr

  • hmm||

    It's hard for people to corner gold. Governments cornering and manipulating price is another thing.

    Oh god that's 2 tinfoil hat posts in as many hours.

  • MNG||

    As rap music becomes more and more popular the demand for gold will increase thereby increasing its worth. So I guess you might have something...

    I'd like to invest in Flavor Flav's grill alone...

  • BakedPenguin||

    Just make sure he doesn't put your money in a new clock.

  • BakedPenguin||

    I find no correlation between reading the posts on H&R and the number of coherent arguments I encounter, hence I skim ;)

    Maybe you should try a stepwise regression this time, MNG. Your R Squared will undoubtedly improve...

    Also, for the seriously hardcore, there are catalytic converters in junked cars. Platinum, palladium & rhodium are used. Of course, the junkers are usually aware of this.

  • smartass sob||

    Of course, the junkers are usually aware of this.

    So are the catalytic converter thieves. Some of the large cities have been plagued with them in recent years.

  • BakedPenguin||

    You do understand the quantity theory of money, no?

    Yes. And what happens when velocity picks up? Oh, right, we can trust Bernanke to be right on top of that.

    Also, IIRC, Friedman & Schwartz castigated the Fed for decreasing the money supply by 1/3.

  • ||

    he's got all the excess currency set to "self detonate", so no worries.

  • Pingry||

    When you have an emergency, you need to concentrate on stabilizing the economy by preventing a massive crisis from turning into the next Great Depression, because it was pretty obvious what would have happened.

    So, while the Fed made some mistakes, let's be pretty honest here. Had they done what the Fed did in the 1930's, we would have gotten the same result. This time around, they got a lot more things right.

    And we can only wait to see what happens next in terms of monetary policy.

    Also, Friedman and Schwartz castigated the Fed for decreasing the nominal money supply by 1/3.

    The real money supply was more or less unchanged because, as I said above, the Fed didn't increase M enough in the face of a massive decline in V.

    Nuff said...

  • BakedPenguin||

    Even if you're right, Pingry, the idea that they will contain the coming inflation is doubtful. Consider the purposes inflation will serve -

    1) As a "stealth" tax. A lot of people still don't get how inflation works, and won't blame the government
    2) As a method to make housing prices rise. While this will only be a nominal rise, it will give some people the illusion that their properties are regaining the value they once had.
    3) As a "stealth" method of paying off debt, which the Obama administration is increasing quite rapidly.

  • BakedPenguin||

    I should probably point out that, in theory, I agree with the monetarists more than the gold standard people. The problem is that it is incredibly hard to match GDP growth and monetary growth. And the current process is hopelessly politicized.

    However, moving back to a gold standard would have problems of its own. A multi-metallic standard that allowed banks to back their dollars with the metal (or other item) of their choice might alleviate this somewhat.

  • ||

    The problem is that it is incredibly hard to match GDP growth and monetary growth.

    No, the problem is that if you let the motherfuckers inflate the money, even if they do it exactly as Friedman wanted, they're cheating us all of the lower prices we should be getting due to improvements in production efficiency.

    -jcr

  • BakedPenguin||

    JCR, no, if it matches GDP growth, it won't be inflation. Even with the (relatively) small inflation we had from 1985-2008, computers, TVs, and DVD players all went down in price - in both real and nominal terms.

  • Warty||

    BP, I don't know shit about money. What about just repealing the legal tender law? Not that it'll ever happen, but what would be likely to occur if it did?

  • ||

    If that happened, the dollar would collapse, and we'd be trading in any number of other currencies, until a few emerged that were widely trusted. Gold would probably be the most popular, but I'd also be willing to accept banknotes backed by gold, as long as they were issued by a bank I could trust. Credit Suisse, for example.

    -jcr

  • ||

    "Ever since the recession hit, waves of new people are suddenly broke. These people have no idea how to live without money. They're what's called new poor."

  • Warty||

    GIVE ME THE SHARPEST ITEM IN THE BAR

  • ||

    Oh, I'm sorry. Well, I can put the trash into a landfill where it's gonna stay for millions of years, or I can burn it up and get a nice smoky smell in here and let that smoke go up to the sky where it turns into stars.

  • BakedPenguin||

    Warty, I suspect banks would have to find something to back their money with, and they would choose metals. They wouldn't all go with gold, though, because there would be a run-up in price to make the recent one look like nothing. The value of all the gold ever produced in the world is about $10 trillion, and we'd need at least 1/5 of that for all the dollars in circulation.

    It's also possible that they would circulate fiat money backed by the assets of the bank - essentially, unsecured bonds that pay 0% interest. People are accustomed to fiat money, and they might be willing to accept this, especially if the FDIC was not eliminated with the legal tender law.

    However, IANAE, so take the above with a grain of salt.

  • ||

    The words "Spandau Ballet" do not appear in the post or any of these comments. Until now!

  • ||

    Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over.

    Wait is he talking about gold?

    Seriously this is such a stupid statement. If money is so worthless then why can you buy gold with it?

    And secondly what intrinsic value does gold have? I guess you can put some of it in circuit boards...but how much is really needed for that?

    Using the arguments that cash has no value generally just exposed how worthless, in a utility sense, gold is.

  • ||

    If money is so worthless then why can you buy gold with it?

    Because governments force people to accept it in payment of debts.

    -jcr

  • JB||

    I prefer guns & ammo to gold.

  • andy||

    why not both? they're a good combo. If you got gold, you'll need to defend it... and not every situation calls for violence...

  • ||

    really? i need to recheck the manual...

  • BakedPenguin||

    Guns never go to a zero price point, either. So long as they're working.

  • ||

    Jim Grant is the best financial writer out there today, hands down. He saw the whole credit crisis/bubble economy problem coming when it was still in the cradle back in the 1980s. I wish his newsletter wasn't so damned expensive.

    I'm a deflationist so it's too bad most of his advice lately is of the one-note "sell dollars and buy stuff" variety, but I'm always delighted when I see one of his columns being widely circulated.

  • Warty||

    So let's say that the currency was backed by some commodity, the entire world's supply of which was used for that purpose. So the amount of money in the country was fixed. As GDP grew, then, there would be deflation. I'm told that this would be bad, but I don't understand why.

    So, why? Why would gradual deflation be worse than gradual inflation, or not-so gradual inflation? It seems to me that with modern instruments and electronic banking etc, dealing with ever-smaller amounts of specie shouldn't be any real impediment to commerce.

  • ||

    Deflation is very bad - for those people who never have to worry about making a living or keeping a roof over their heads.

  • juris imprudent||

    Inflation and deflation are the monetary system warping the underlying economy (due to too much or too little money in circulation). Ideally, the money supply shouldn't be messing with price levels; if that is a problem with fiat money (when not well managed), it is no less one with a commodity money (since it's chief merit is that it is pretty much static).

  • MacGhil||

    1) As a "stealth" tax. A lot of people still don't get how inflation works, and won't blame the government

    People sign petition to "increase inflation to 100%" to purposely cause hyperinflation

  • Citizen Nothing||

    What? No love for private, competing currencies?

  • robc||

    JCR @ 5:06, but you cant look it up that easily because of stupid threaded comments.

  • juris imprudent||

    Aside from one post, no. A private currency is just a private FIAT currency. It is all a matter of trust that the supplier of the currency isn't cheating you.

    Competing currencies impose significant transaction costs.

  • Cliché Bandit||

    A simple point: Most who think being a "gold bug" is irrational and at the same time think they are better armed are truley the irrational ones. Gold bugs in my circle of friends make the US Marie Corps look like a girl scout party. You bring you wall stree suit down here to the mountains and just try to take someone's gold. The most difficult decision for those who have it is which series of weapons to kill you with. Keeping hard assets (at home that is) requires a certain level of protection...hence the mass armarments. In the end it really doesnt matter. If the shit hits the fan that bad then, for a time, gold will be worth less than survialist type preparations. But that wont last forever AND I don't think it will get that bad.

    A good glass in the Bishop's hostel

  • Invisible Finger||

    The main problem with any metal standard is the central bank setting gold's value and not letting it float. Gold-backed paper dollars are still fiat because the value of the dollar in ounces/grams of gold is set by fiat rather than the market.

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