Business and Industry

Everything Still Turns to Gold

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Ron Paul associate, old libertarian movement hand, and retired coin dealer Burt Blumert is profiled at the San Francisco Chronicle's website. An excerpt:

Precious-metal prices tend to increase in times of economic uncertainty and a weakened U.S. dollar. And this inverse relationship is key to understanding Blumert's reference to gold dealers' dismal view of the future. To a philosophical goldbug, when the price of their commodity increases, it's a sign that the global economy is tanking. Inflation is proof that the fiat money system is an illusion — and an affirmation that, in the portentous, Arthurian terms of a recent book by Nathan Lewis, gold is The Once and Future Money.

But — and here's the paradox — for the goldbug's worldview to be finally vindicated, the fiat money system has to collapse. "Many of my clients would like to be standing in the rubble of our society saying, 'I told you so,'" Blumert says. "And there was a time when I did want collapse — when I was young and excited about my view. But the older I get, personally I can't deal with rubble anymore. I don't want to see a collapse, to be vindicated and say, 'See, I was right.'"

My reason interview with Nathan Lewis, mentioned in the above excerpt, on gold. Recent goldblogging from Matt Welch.

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  1. Weird. I’m going to my local coin shop at lunch today. I’ll admit, I’ve been bitten by the gold bug. I figure if at least part of my holdings are in precious metal I’ll be in good shape if there is a collapse.

  2. The thing to look-at is not gold, it’s silver. A lone blogger named Ted Butler has been doing the media’s (including Reason’s…) job of actual journalism on the issue, and the level of naked shorting by VERY few parties is stunning. http://news.silverseek.com/TedButler/1203445598.php has more.

    I also love how matter of factly this:
    http://www.silverstockreport.com/2008/barrick.html article says “the counterparty is likely the US government” despite the fact that the US government CONTINUALLY has denied (under various administrations…) trying to influence the gold price to hide inflation. They lie. What’s new? Hell, look at their attack on e-gold and every other attempt at honest money! They’re liars, and they’re our government, whether or not financial “journalists” even do a half-assed job on the issue (and obviously, most of ’em don’t!).
    JMR

  3. I’ll stick with the stock market, thanks.

  4. If the system collapses, a few people with gold in their pockets are going to be moderately better off, but pretty fuch mucked with the rest of us. You can’t counteract a global economic collapse by having a few shiny coins under your mattress. If you want to invest in rare metals, go ahead, but don’t think you are going to survive the apocalypse if you do.

  5. Marcvs,

    No kidding. If the system collapses, I’d feel more comfortable being well-stocked in lead instead of gold.

  6. canned and dry goods are the future of investment

  7. As a home owner, I have a vested interest in not rubble.

  8. Marcvs, I hear you, but I think a little diversity in investing is a good thing anyway, and like John-David said, I already have a good supply of lead on hand. I agree that everyone will pretty well be screwed in a global collapse, but in that case we’ll probably be returing to the barter system as it is, right?

  9. Look at the dustbin of history to those civilizations/states that inflated their monies to the point where their luck ran out:
    Rome, Byzantium, Florence . . .

  10. Guys, it might just be a good idea to have some of BOTH lead and gold, but if you look at recent history, it appears the REAL opportunity, if you can stomach some risk, is in silver.

    And I still love how poorly journalists have done on this issue, I can’t say enough about it. The proof comes whenever ANYone tries to debate someone like Butler or GATA’s Murphy. Invariably, we see name-calling from their cogent “mainstream” opponents. It’s as if nobody ever took high school level debate class, and just about nobody but me calls ’em on it…
    JMR

  11. mediageek brings up a good point as well. For many folks, gold is used as a store of value, and real estate has a place for that as well. Buy a home and protect it with guns and insurance. A roof over your head is always a good thing.

  12. The joy of fiat money is that there are so many different currencies out there. It’s fairly common for poorly managed currencies to collapse, but they usually only take down the economy of the issuing country and have relatively minor effects on other currencies. Similarly, if a currency is well managed and the issuing government maintains large stocks of hard assets (gold, silver, weapons grade plutonium), it’s a total collapse becomes unlikely. Just because we’re off the gold standard doesn’t mean we go out and liquidate Fort Knox.

  13. gold, silver, weapons grade plutonium

    The Roentgen Standard

  14. I wonder if it’s all a ploy..
    If the dollar does crash..I think the “elites” might just change the currency to something like a “Amero”..just another way to push through the NAU agenda..
    Please read:
    http://www.naturalnews.com/z022707.html

  15. Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor!

  16. lolgoldbugs!

  17. Until the credit crunch, gold was a horrible store of money over the last 30 years. The reason we’re seeing a resurgence of gold bugs is because of the current gold bubble. If gold fell back to $400/oz the gold bugs would disappear.

  18. I figure if at least part of my holdings are in precious metal I’ll be in good shape if there is a collapse.

    Sage, my man, don’t forget we did this once before. Back in the Dark Days of Disco when the world showed much more of the signs of imminent collapse than it does today.

    Gold was pushing a thousand dollars and ounce and my roomate was stocking up. Why even TWC had a pocket full of 1/4 Rands and a few bags of junk silver. My uncle was stocked with canned goods and mason jars together with an arsenal and a shed full of shotgun shells in anticipation of the hordes that would come up from the Bay Area looking for food after the world descended into madness.

    Then, a few years into Ronnie Rayguns, the gold plummeted like a dead mobster with concrete overshoes.

    I think the overall idea that gold is good to hold in uncertain times, especially if you bought in before everybody figured out you should buy in, is sound.

    But, like the man said, for it to ultimately work out, the economy must collapse. If that happens, most of us are going to be in the same boat anyway and there ain’t going to be much to buy with your gold.

    Lew Rockwell’s Doom Saying notwithstanding, IMO complete collapse is not very likely.

  19. If the dollar does crash..I think the “elites” might just change the currency to something like a “Amero”..just another way to push through the NAU agenda..

    jen, – Lonewacko.
    Lonewacko, – jen.

    Hey, somebody had to introduce them.

  20. Remember the 4Gs:
    God, Guns, Grub, AND Gold

  21. TWC, I hope to God you’re right. If the PM I buy does nothing more than look pretty, at least I’ll have something of value that I can leave to my kids.

    And if the price of PMs does fall like I figure it probably will, it’s not like I put all my eggs into that basket. It won’t be enough to cry over, that’s for sure.

  22. I recently looked at buying some gold coins as a store of wealth and a way to diversify my portfolio.

    Then I realized a bunch of other people were doing the same thing, and that it’s probably a dumb idea to buy now. Call me optimistic, but I’m going to wait a bit and see where the market goes.

  23. Hey, somebody had to introduce them.

    Great. Next thing you know, they’ll be breeding.

  24. mediageek,
    A good way to invest in gold without buying gold coins is to buy an unhedged gold mining stock (like Barrick). Their stock prices fluctuate with the price of gold and you genus of being able to use the liquidity of equity markets. It’s a good counter-cyclical diversification.

  25. The early 80s are much like today including inflation…. IF we used the same inflation formula they used back then. The government has been playing with this formula to minimize Social Security and other automatic cost of living adjustments on various entitlements and pensions. The current Social Security payments are 70% lower than they would have been under the 1980 inflation formula!!!

    The difference is that our national debt is sky high and for Bernanke and the next President to raise interest rates to 21% (like Volcker/Reagan did) to counter inflation and restore faith in the dollar would mean that the interest payments on our national would go sky high.

    Gee mee nee folks, are Reason and the libertarian party not teaching the young folks anything about money any more. Some of the previous commentators must have gone to the same economics classes as Matt Welch. This is important! Do your homework….THIS WEEK.

    We want libertarians to set a good example for others AND to have the resources to do something in the aftermath. Gold will do little good during a collapse, barter would be the order of the day, but later….THEN gold will be valuable for rebuilding.

  26. You could try pointing to a place like Zimbabwe which has, no joke, a ten million dollar bill which won’t pay for a hamburger. Need we any more proof of how fragile fiat money is? I’d compare it to the inflation in Germany before the Nazis came to power but Zimbabwe already has a pathological dictator.

    P.S Is Goodwin’s law invoked for any Nazi reference or only for gratuitous ones?

  27. You can’t eat gold, you can’t live in it. Gold is only as good as what it can buy. Goldbugs are basically wingnuts and their obsession with the metal as the only hedge against inflation. Lets say the worst fears of goldbugs are right and the government is going to devalue the currency and we are going to end up with Weimar Germany. If that happens, any commodity will serve as a hedge against inflation. During the German hyper inflation, there used to be runs on the stores at the begining of the month because people would get paid and buy as many goods as possible and then sell them off over the course of the month as a hedge against inflation. If really think hyperinflation is coming, stockpile something useful like gasoline or flower. I guarantee you under those circumstances, a few hundred gallons of gasoline or a few hundred pounds of flower or cases of MREs will buy you a hell of a lot more than a bunch of gold coins.

    Also, even if the US fell into hyperinflation, the rest of the world wouldn’t necessarily follow. If you think the dollar is doomed, go down to the bank and get yourself some Euros and do a little arbitrage as insurance. Even the biggest gold wingnuts are hard pressed to come up with a scenario where every major currency tanks at one time.

    Basically goldbugs are wingnuts. As soon as someone starts talking about the gold standard or worse yet investing in gold to prepare for the end I just tune them out. As Warren correctly points out above, we went through this in the 1970s when gold was a lot higher in current money than it is now. We also went through the falling dollar in the 1980s. Markets work. They work in money just like they work in every other commodity. As the dollar falls, the US will export more and import less and the current account deficit will close and the dollar will rise back up to equilibrium. It is funny, often the same people who rail on China and India for manipulating their currencies down for an unfair advantage in trade, turn right around and argue a low dollar is the end of the world. I understand the dangers of devaluing your currency, but we are a long way from that and there are things happening right now, a slowing US economy, booming exports, slowing imports, that are acting to keep that from happening.

  28. Inflation is proof that the fiat money system is an illusion …

    *Sigh* Gold money is also an illusion because gold itself is intrinsically worthless. Its major use is decoration. We use gold as money in large part because it has next to no other uses. Gold currencies are plagued deflation ever bit as bad as fiat currencies are plagued by inflation. In the modern world with its high productivity, a major gold currency will deflate almost instantly. For example, imagine trying to store the value of computation in gold. The same amount of gold tomorrow would always buy more computing power tomorrow.

  29. “Goldbugs are basically only wingnuts.” Wow! You called one perjorative another perjorative. What’s a wingnut, and how is a bug, golden or otherwise a wing or a nut?

    Thanks.

  30. John,

    The wingnut goldbugs and people who support the gold standard are two different groups. Although, the goldbugs are a subset of the other.

    Also, I doubt a few hundred lbs of flower are really going to do you any good. I dont normally mock spelling, but that was funny.

    So, in summation: Gold Standard good, holding gold as a hyper-infaltion hedge is probably silly, unless you cheated on your wife a lot, 100 lbs of flower bad.

  31. I am a long-term gold bull and have some physical holdings of both gold and silver bullion as my “insurance” in case Ben Bernanke does a little too much Keynesian Coke (TM) one night and winds up printing the dollar into oblivion.

    Still, I hope these holdings are worth *less* five years from now than they are today. I just visited Zimbabwe this past weekend where I bought a 10 million Zimbabwe dollar note for 1 U.S. dollar. Any goldbug who wishes for this kind of collapse is a fool.

  32. robc,

    The gold standard is not some magic talisman against inflation. The government is always free to debase the coinage just like they are free to print money now. The flaw in the gold standard’s argument is that if the government is so untrustworthy with paper money, why would it suddenly become trustworthy with gold money? It wouldn’t be. But, even assuming for the sake of argument that it would be, as Shannon Love rightly points out, absent a huge increase in the supply of gold, gold currency produces deflation. Deflation is just as much of a danger as inflation. Inflation is bad because it destroys predictability. You want price stability so that markets can reach equilibrium and price conveys the current and future real value of a product. Deflation destroys that stability just as badly as inflation. For example, deflation totally screws debtors. That is why farmers hated the gold standard so much. A farmer would borrow X amount of money to pay for his land and fixed costs over a long period of time. He then sells his crops to pay that debt. The problem is that with deflation, the real value of his debt keeps going up and the money he gets from selling his crops keeps going down. There are a million permutations of how deflation serves to screw people over. Goldbug or not, gold standard advocates just do not understand modern economics.

  33. I am a long-term gold bull and have some physical holdings of both gold and silver bullion as my “insurance” in case Ben Bernanke does a little too much Keynesian Coke (TM) one night and winds up printing the dollar into oblivion.

    That’s really where I’m going with this. I hope that I am able to live off the dividends of my GE stock rather than selling off coins to buy gas and food when I’m retired.

    I do think the dollar will make a comeback. I just hope the federal government stops spending so damn much of it.

  34. I have a degree in economics but I’m not convinced that deflation is that much worse for “ordinary” people than inflation. (The issue is often confused by the fact that Austrians use these terms to refer to changes in the supply of money & credit, while most others use them to refer to changes in the level of prices.)

  35. Gold currencies are plagued deflation ever bit as bad as fiat currencies are plagued by inflation. In the modern world with its high productivity, a major gold currency will deflate almost instantly. For example, imagine trying to store the value of computation in gold. The same amount of gold tomorrow would always buy more computing power tomorrow.

    Yeah, imagine the horror of having your stockpiled gold worth more the longer you hold on to it.

  36. Lets say the worst fears of goldbugs are right and the government is going to devalue the currency and we are going to end up with Weimar Germany. If that happens, any commodity will serve as a hedge against inflation…. I guarantee you under those circumstances, a few hundred gallons of gasoline or a few hundred pounds of flower or cases of MREs will buy you a hell of a lot more than a bunch of gold coins.

    Perhaps, but if you live in an apartment, condo, or small house, a shoe box full of gold coins is a lot easier to stockpile than a warehouse full of flour or a few tanker trucks full of gasoline, and a lot less conspicuous as well.

    Assuming as you do that the rest of the world won’t also collapse, gold will probably buy just as much as it does now, while your stocks, bonds, CDs, money markets, and cash holdings will be almost completely wiped out.

  37. A good way to invest in gold without buying gold coins is to buy an unhedged gold mining stock (like Barrick). Their stock prices fluctuate with the price of gold and you genus of being able to use the liquidity of equity markets.

    Be careful though. Look at the 1-year chart for NovaGold (NG) for a cautionary tale. Gold mining stocks have company-specific risk that gold does not.

    If you want liquidity, you might consider the ETFs (exchange traded funds) like GLD and others.

  38. “I have a degree in economics but I’m not convinced that deflation is that much worse for “ordinary” people than inflation.”

    It is not necessarily worse but it can be just as bad. Deflation is terrible for debtors which most of us are. Think about student loans, which many people have. Imagine you have say $50,000 in student loans that you are paying off over ten years. If there is deflation of say 5%, every year the real value of that debt goes up 5%. In the same way the inflation raises salaries in dollar terms, deflation lowers wages. If you assume you stay in the same job, you are making 5% less every year under deflation. That doesn’t hurt you because your money is worth 5% more every year. But of you are a debtor, you are screwed because you $50,000 debt stays the same, it is just 5% higher in real terms. Imagine what a hardcore system of deflation would do to average people carrying tens of thousands of dollars of fixed rate student loans and credit card debts? It wouldn’t be pretty.

  39. John,

    But the deflation rate would have been factored into the decision making process before the loan was taken out. A 5% deflation rate and a 1% interest rate is (roughly) the same as a 3% inflation rate and a 9% interest rate.

  40. Craig,

    Yeah, imagine the horror of having your stockpiled gold worth more the longer you hold on to it

    Okay, for the economy to work people have to exchange things. If people don’t exchange things because they believe they can get a better deal tomorrow then nothing works. Put another way, in a deflation you can’t sell anything, even your labor because everyone thinks they can buy more of what you sell tomorrow. If everybody sits on their stockpile of gold then everybody loses. Everybody sits around on their hoard of gold until they starve.

    Most of the depressions of the 1800’s were caused by deflations. The industrial age triggered deflation by rapidly increasing productivity. Increases in productivity cause deflations because greater productivity allows more stuff to be made with less input. That means that a fixed supply of gold will buy more tomorrow than it does today.

  41. Shannon,

    Currently people can buy more tomorrow than they can today by not using credit cards and paying high interest rates. Yet they do it anyway. So, apparently, people will spend despite the fact that their money will buy more tomorrow.

  42. Remember the 5 Gs. Gold, groceries, guns, gas and girls. Not sure of the order but all are important to me.

  43. Also, I doubt a few hundred lbs of flower are really going to do you any good. I dont normally mock spelling, but that was funny.

    Personally I’m stocking up in tulip futures; those things NEVER depreciate!

  44. A collapse is not necessary for significant appreciation in the price of Au/Ag. There is increasing demand from increasingly rich 3rd world countries. There is also less gold mined each year than there are dollars created each year, percentage wise.

  45. “John,

    But the deflation rate would have been factored into the decision making process before the loan was taken out. A 5% deflation rate and a 1% interest rate is (roughly) the same as a 3% inflation rate and a 9% interest rate.”

    That is assuming that people know what the deflation rate is going to be. You could say the same thing about inflation, which is why interest rates go up when people expect inflation. The problem is that you often guess wrong. Further, there are hundreds of billions of dollars worth of debt out there taken out under the assumption of a fiat currency. If you without years of warning instituted the gold standard and the accompanying deflation, the adjustment period would be awful. People would be stuck with debt that was increasing in real value every year, but with an interest rate that assumed moderate inflation throughout the course of the loan. Sure, maybe some people could refinance at lower rates but a lot of debt, like student loans or unsecured credit cards may be too big to refinance.

    Yes, you are right that deflation can and would be factored into the interest rates. But that is exactly why deflation is just as bad as inflation. Anything outside of price stability introduces a unpredictable variable into the equation.

  46. As Warren correctly points out above, we went through this in the 1970s when gold was a lot higher in current money than it is now.

    That wasn’t Warren.

  47. Sorry wine. I don’t know why I saw Warren. Too many Ws I guess.

  48. Barrick isn’t REALLY unhedged, if you believe Jason Hommell (url above).
    JMR

  49. Sage, I hope I’m right as well. If I’m wrong most of us are going to be in a world of hurt, which puts us all on a pretty much even footing. However, if gold retains some value, those who have it are going to be able to buy some mighty fine weaponry to keep the masses at bay.

    PLUS, like the man on the radio said: GOLD HAS NEVER BEEN WORTH ZERO.

  50. John, no harm no foul, I’m just a baby. 🙂

  51. John,

    The only wasy to have price stability is to have money backed by a commidity that is expanded (new gold dug up, more flour milled, whatever) at EXACTLY the rate of productivity increase (and shrink with productivity decreases). Obviously, no monetary system can match that. However, long term, the gold standard did a much, much better job than fiat money has done. Prices in 1800 and 1900 were much closer than 1950 to 2000. And that is ignoring situations like Zimbabwe.

    I also know of no way to instantaneously end up back on the gold standard. Well, we could just decree that gold = $900 per oz. However, the right to cash in for gold wont be happening for a number of years in that situation. So the “initial” shock factor doesnt really matter. Any massive change in system will cause that. Same for “fair” tax. Whether it is a good or bad idea, there is no question that it would cause chaos for 1-2 years. I consider that a good thing.

    /Hail Eris

  52. Gold, groceries, guns, gas and girls

    Excellent advice but all of you guys with your God, Guts, Guns, dah, dah, dah, dah remarks are slightly skewed in your thinking.

    I subscribe to the Rudyard Kipling survival model:

    A man can never have too much red wine, too many books, or too much ammunition!

  53. Actually Shannon, gold is not intrinsically worthless. It’s used in quite a number of electrical components, satellites, cancer treatments, etc. The reason it’s used as money is its physical attributes. It doesn’t corrode, it’s soft and malleable (so its easy to subdivide) and dense (so it doesn’t take up much room). So if you’re going to use a commodity to back money, gold has a lot of favorable physical qualities. I do agree completely on your dissing of commodity backed money though.

  54. “The only wasy to have price stability is to have money backed by a commidity that is expanded (new gold dug up, more flour milled, whatever) at EXACTLY the rate of productivity increase (and shrink with productivity decreases). ”

    That is true. I don’t know what the rate of increase in the gold supply is, but my guess is that it is a lot lower than the rise in productivity. In an ideal world a currency backed monitary system can work. But so can a fiat based monetary system. The fact is that we are not living in Weimar Germany and are not likely to be anytime soon. If and when that happens, then fine we can go to the gold standard. In the mean time, it sounds a lot better to me to avoid all of the chaos associated with bringing it back.

  55. The funny thing about the real gold bugs is that they don’t realize they would be screwed in a meltdown anyway. If we ever had hyper inflation and the goldbugs were proven correct, the government would go to the gold standard and reissue the currency. Hurrah!! Right? Not so fast. In doing that the government would ban the private ownership of gold and forcibly buy all of the gold then in circulation at a set rate in the new currency and the goldbug would get the same amount of the new currency for his treasured gold as his neighbor gets for his stack of five trillion dollar notes. In the end all that gold hoarding won’t have done him a damn bit of good.

  56. Good point, TWC. My emergency barter supply is in the form of bourbon. Come the apocalypse, I figure one bottle of Beam can be traded for a few day’s supply of Twinkies, toilet paper and shotgun shells.
    And should the deluge never come, I can always find a good use for my stash.

  57. The late 80s gold plummet was caused by something most goldbugs do not admit: a gold standard creates a massively huge increase in the demand for gold. Getting off the gold standard created the plummet, but it was delayed effect. A few other countries were still on the standard, and inflation worries kept the price high. The plummet was basically a massive market correction.

    Inflation also increases the demand for gold, as people invest in it as an inflation hedge. If the next adminstration reins in the Fed’s expansionism, expect to see another plummet in the price of gold as people abandon it for growth investments. The drop won’t be as big as the 80s, but enough to be painful.

    A far better investment than bullion gold coins, are collectible gold coins. (Or silver, platinum, etc).

  58. p.s. Speaking of Burt. He was at a Ron Paul Meetup a couple of months ago, where he told a conspiracist tax protester to STFU. Priceless!

  59. Unless you are very lucky or some kind of insider it is pretty damned hard to get rich investing in any commodity be it gold or oil or concentraited orange juice. Eventually the market pulls the prices of those commodities back to equalibrium. You are better off investing in people companies who actually make services and products people want. Actually providing something that people need is a better hedge against inflation than about anything.

  60. I could either a) read von Mises Theory of Money and Credit and try to understand this stuff, or b) call the better informed set wingnuts.

    Oh, this is hard stuff. Damn, all you wingnuts!

    You might want to keep that pile of old Wall Street Journals you have amassed, John. Who knows it might keep you warm at nights.

    Like you said, ‘the market works’. Then behave like you believe in it instead of bureaucratic figureheads like Greenspan or Bernanke,

  61. “The Federal Bureau of Investigation, the Hostage Ruination Team, and the Federal Marshmallows, need be advised, along with our readers, that there is a stash of the forbidden NORFED Liberty rounds herewithin. And they ought be further advised that, should these agents come knocking on our front door, that there is on the other side of that door, a 12-gauge, poised for action and hungry for justice. Because Uncle Sam has laid down the rules of engagement, and we will follow them.”
    — David Bond, journalist

  62. I think that more than paleo vs. cosmo, the real fault line in the libertarian world is pessimist vs. optimist.

  63. Fuck off alan. I have read all of that stuff and got my degree in among other things economics. Further, it is not like there are not a lot of very smart, serious people who think that the Von Misses theory of money and credit is bullshit. Sometimes you get called a moonbat because you are.

  64. Or maybe moonbat vs. wingnut…

  65. Citizen Nothing,

    Oh cosmos and paleos are both very optimistic.

    John is optimistic that there are WMDs in Iraq,
    and I’m optimistic that there is no predicative value in either foreign or economic policy coming from the WSJ.

  66. Citizen Nothing,

    It is a certain kind of person who is attracted to this kind of thinking. I think part of it is a bit ludite. People just can’t grasp the idea that money might not be something tangible. It is the same kind of thinking that looks at foreign trade as a zero sum game. For sure, lots of gold standard types believe in free trade. But they swim in the same paleo swamp with the Lew Rockwells and the John Birchs and the survivalists living in compounds in Idaho. I don’t get any of them.

  67. Well, we could just decree that gold = $900 per oz.

    I never understood the whole point of this price fixing except as a government attempt to rip off the public.

    If I want a receipt that says I have X amount of gold in storage, I want that expressed in ounces and pounds, not a dollar amount. Bringing in 1 ounce of gold to a reserve bank and getting 9 $100 gold certificates in exchange seems like it’s purposely trying to confuse.

  68. Alan,

    I have the entire productive world and world economy, all 40 trillion of it, that says you are full of shit. You have your fervent hopes and prayers that some day the whole thing will end and you will be proven right and be able to say I told you so. I am not betting much money on your predictive powers.

  69. I’m just glad that when I started investing in the 80s I didn’t listen to the gold bugs and instead put my dollars into the stock market.
    (Past performance does not guarantee future results. Moving machinery can grab, mangle and dismember. Wash hands before returning to work.)

  70. Yes, you are right that deflation can and would be factored into the interest rates. But that is exactly why deflation is just as bad as inflation. Anything outside of price stability introduces a unpredictable variable into the equation.

    Instability comes from the fact the prices reflect artificial induced stimulus. Take the recent housing bubble. Federal Reserve subsidize the industry with rates that do not accurately reflect the reality of risk, people buy houses outside their natural range of what they can afford and banks take risk that they would not have taken if the rates accurately reflected the market.

    Accuracy, not stability John, is what is important in prices in a free market. Send your degree back in the mail and go back to econ 101, and this time get a better class of professors.

  71. “Accuracy, not stability John, is what is important in prices in a free market. Send your degree back in the mail and go back to econ 101, and this time get a better class of professors.”

    You can’t have accuracy if you don’t have predictability. Price instability, be that up or down takes away the predictibiliy thus the accuracy of prices. Try to learn more about a subject then just enough to be dangerous.

  72. “Take the recent housing bubble. Federal Reserve subsidize the industry with rates that do not accurately reflect the reality of risk, people buy houses outside their natural range of what they can afford and banks take risk that they would not have taken if the rates accurately reflected the market.”

    The fed subsidizing rates are only part of it. The fact is that the market made loans based on the assumption that housing prices would go up forever. People who should have known better actually believed that housing prices would never stop rising. It doesn’t matter if someone can make the payments or not because they can always flip the house for more money and still payoff the loan. That idea more than anything else drive the housing bubble. It wasn’t the interest rates. If it had been, the bubble would have burst when the fed began raising interest rates several years ago. No amount of currency tinkering is going to end the business cycle and the possibility of people making bad decisions.

  73. Price instability, be that up or down takes away the predictibiliy thus the accuracy of prices.

    Not sure I agree. Accuracy exists at a single point in time, while predictability, as you
    define it, is stability over time.

    You can easily have prices that are both accurate and volatile.

  74. Prices are accurate when they reflect the actual supply versus the demand of goods. The supply and demand of goods are often due to events (a bumper year in crops, etc) in flux.

  75. Send your degree back in the mail and go back to econ 101, and this time get a better class of professors.”

    Where? I don’t think any college in the world has an economics department that believes in this crap. Being an academic economist and believing in Von Misses is like being an astrophysicist and having the Ptolemaic view of the solar system. It really is that out of date and inaccurate. No one in the mainstream believes it.

  76. “Not sure I agree. Accuracy exists at a single point in time, while predictability, as you
    define it, is stability over time.

    You can easily have prices that are both accurate and volatile.”

    But my price will go up based upon where people think the future is going. If I think the price is going to go up of a good in the future, I am willing to pay more for it now or conversely will not accept less now. You want prices to reflect the actual value of the good, not everyone’s guess about next month’s inflation. If you have price stability and a dollar is worth now about what it is worth a year from now, then everyone can price goods based on what they are worth not what they think inflation or deflation will be. Certainly you will still have speculation, but lack of price stability inhibits people’s ability to plan and act rationally. No one to my knowledge, even those who seriously advocate the gold standard, would argue that deflation or inflation is a good thing. Understand, when I say price stability, I mean the overall value of the dollar. I don’t mean that the price of wheat should be the same every year. That is going to vary by market. What you want is for the price to reflect that variation, not the variation in the value of the dollar itself.

  77. Whatever the advantages or disadvantages of hard money coined by the gubmint, the Feds running a mint is still a statist solution to the problem of developing a trustworthy means of exchange. There is always the idea of competing private currencies, backed by [fill in the blank.] Those who only trust gold, silver, platinum or any other metal could use that. Others who prefer some other standard [ computer processing power, barrels of petroleum, CO2 credits, labor person-hours…] would be free to choose one. Someone would, no doubt, make a fortune providing an exchange for the various currencies, and probably index funds based on the most popular alternatives would develop. A share in the most trusted of these might be the “dollar” used by “widows and orphans.”

    Good luck trying to get the gubmint out of the seigniorage business, though.

    BTW, John, you may be right about Mises, but you have used nothing but an Argument From (possibly false) Authority to back it up. I don’t have an econ degree, but I studied it a bit in college, and have read some on my own. If you had the least respect to those reading the forum you would at least attempt to actually make an argument, or point us to a criticism of LvM or the Austrian view as a whole, suitable for we laypersons.

    Kevin

  78. Keverob,

    I have spent paragraphs above explaining how the gold standard would cause deflation and screw a ton of people, would not be immune to inflation since the government could always debase the currency, and is designed to solve a problem (hyper inflation) that right now doesn’t exist and has not existed since the 1920s in any extreme form or the 1970s in even a bad form. That is not appealing to authority.

  79. Money is just another commodity. Personally, I’m not a goldbug, I have my money in Yen if that’s ironic enough for you.

  80. John,

    is designed to solve a problem (hyper inflation) that right now doesn’t exist

    See, there is the problem. You have misidentified the problem. The problem that the gold standard solves is that our current fiat money is backed by “full faith and credit of the US”, of which I have none. Gold backed money is backed by something. I have faith that gold (or silver or platinum or SPYders) will continue to have value. I want my money to be backed by some commodity so that it has value other than “being a dollar”.

  81. John,

    I can see your point about going on a full-on gold standard causing problems, but do you see precious metals as a poor investment? One think I like about gold is that if you are selling less than 25 ounces you don’t have to report it.

  82. John,

    I’ve been influenced by Mises, but also by Friedman and others usually considered “free market” economists. I don’t want a monopoly currency that can be manipulated by politicians. I don’t want the money supply artificially inflated. Neither do I want it artificially contracted. I want market forces, rather than the government, determining the price level. Note what Graphite said:

    The issue is often confused by the fact that Austrians use these terms to refer to changes in the supply of money & credit, while most others use them to refer to changes in the level of prices.

    This is like saying that one’s height would be “shrinking” or “growing” if the government habitually redefined the length of the foot and the inch, when in fact you still top out at the same 6′ you did before they started monkeying with the tape measure. Now, if you actually had grown to 6’1″ in “old inches,” that wouldn’t be “height inflation,” but a secular increase in your height.

    It was Friedman, not the Austrians, who said …inflation is always and everywhere a monetary phenomenon, BTW.

    I would have been quite happy if the provision in Article I of the Constitution, giving Congress the power

    …To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures

    had been merely a one-time grant of authority to define what standard of weight would be used when the government made and accepted specie payments. Congress could have declared what an “American dollar” was, and left it to private enterprise to supply the country with coin, bank notes and whatnot. I could do entirely without legal tender laws, frex.

    The natural response to a deflation in a commodity-money environment is entrepreneurial activity to deal with scarcity of the medium of exchange. New sources of the relevant metals are sought, more efficient uses are invented, and substitutes are developed. Eventually a new equilibrium is established. Compare that to the record of politically controlled fiat money, or even to government monopoly coinage that is debased as a matter of policy. Part of the a little inflation is a good thing meme we owe to Keynes’ followers actually depended on the public’s economic illiteracy. (They won’t notice that half their 2% annual pay rise is being eaten away by the 1% yearly increase in the CPI. Yes, we are cheating them, but we must guarantee that demand doesn’t slack.) The levels of “good inflation” contemplated were well below those the U.S. experienced during the Korean and Viet Nam wars, let alone during the Ford/Carter stagflation period. There is no natural barrier to money creation in a fiat money environment, and not much of one with fractional reserve banking. In theory, money creation will be in line with GDP growth, but if even the sainted Greenspan could have let the subprime mortgage debacle happen, what hope can we place in lesser mortals? 🙂

    Kevin

  83. The problem that the gold standard solves is that our current fiat money is backed by “full faith and credit of the US”, of which I have none.

    You should have a great deal of faith in the willingness and ability of the US government to raise money by taxing its citizens.

  84. But Gold is so shiny!
    I, however, will continue to add to my investment cache of brass and lead.

    In the event of utter societal collapse (or Zombies) it will be more valuable.

  85. We’ll never go back to a Government backed Gold Standard. The Classical Gold Standard. Just isn’t going to happen. But we could have free market money. Gold and Silver circulating in the economy. Since all the gold in the NY FED and FT Knox are doing nothing but sitting in vaults, return it to the taxpayers. As long as the government has most of the gold, it will never function as a monetary unit.

    Banks should be allowed to issue gold coins measured by the gram. The gold market would set their price daily 28grams, 21, 14, 7, 3.5 gold coins.

    How Gold was Money How Gold could Be Money Again

    We don’t have central planning in manufacturing, farming, high tech etc etc, then why on earth do we have central planning with our money???

  86. Because,
    We don’t have central planning in manufacturing, farming, high tech etc etc, then why on earth do we have central planning with our money???
    to do otherwise than to have government appointed central planners to do so, would be in John’s words, ludite

    Hahahahahahaha-lol-Hahaha!

    BTW, Good argument you made kevrob.

  87. John,
    Actually, I think that people look at government controlled currencies and wonder if it’s really such a good idea to depend on the government to maintain a stable currency.

  88. I’m not so sure that a gold standard necessarily cause deflation. More likely that the long-term reduction in prices in the US from 1800-1900 was connected to dramatically increasing productivity as anything.

  89. I do not favor a return to the gold standard any time soon, but I think the way that Shannon and John are tossing around inflation and deflation as conceptual equals is wrong.

    I think the fact that deflation favors savers and punishes debtors would be a feature, not a bug.

    What you have to remember is that to the Paulians and the goldbugs the absence of a gold standard is partially a moral issue. They actively prefer a system where savers are favored over debtors. In addition, the use of a fiat currency facilitates two things – the Federal Reserve discount window and government deficit spending – which, as the goldbugs are fond of saying, “invents money out of thin air” and they see this as theft or the equivalent of counterfeiting. Inflation is a secondary effect to these folks; their primary complaint is one based on equity, where the state or quasi-state banking bodies can invent money with the stroke of a pen, an entry in an account book, or the auctioning of a security.

  90. I think the fact that deflation favors savers and punishes debtors would be a feature, not a bug.

    With a neutral currency neither savers nor debtors would be favored or punished. The reason the country as a whole doesn’t save is because of the inflationary currency. Even those who DO save aren’t really saving as much as they are investing. Putting funds in my IRA is an investment, not saving.

  91. Its been 15 years since I looked at it, but I seem to recall that the 19th century “gold standard” era featured a number of crushing depressions, routine bank failures, etc.

    Our current banking and monetary system didn’t come out of whole cloth. It was evolved over decades of trial and error and response to crisis. I suspect that, like democracy, it is the worst system, except for all the alternatives. I, for one, am very, very reluctant to fuck around with it.

  92. RC,
    It is true that there were market fluctuations with the gold standard. However, these usually involved mass speculation, overconfidence, etc., and did not feature the gold standard as a culprit per se. Given that our current system of unlimited government power over the money supply has caused a lot of woe in and of itself, and given my distrust of government in this area, I would say a hands off, competing currency (with gold probably emerging as the dominant currency) system would be preferable.

  93. stockpile something useful like … flower.

    The Dutch already had a Tulip Bulb speculative bubble – please go and look it up, it’s hilarious.

    As one or two others have noted, in the case of real economic collapse my lead trumps your gold or silver. Deal with it.

  94. I’m not so sure that a gold standard necessarily cause deflation. More likely that the long-term reduction in prices in the US from 1800-1900 was connected to dramatically increasing productivity as anything.

    Right and the fact that you couldn’t increase the money supply (by mining gold) fast enough to keep pace with the increased production. The advantage of fiat money (btw, even commodity back money is fiat, someone decides how much gold $1 represents), is that the money supply can be expanded and contracted along with productivity.

  95. As one or two others have noted, in the case of real economic collapse my lead trumps your gold or silver. Deal with it.

    You think your lead bullets trump my silver ones? I wouldn’t be so sure of that, if I were you.

  96. With many new announcement about the wizard of oz movies in the news, you might want to consider starting to obtain Wizard of Oz book series either as collectible or investment at RareOzBooks.com.

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