If Only Gold Were Our Currency!

When you post any thoughts about gold, you're inevitably going to end up with some folks who bring up the currency issue. "Gold is a currency," they say. "Gold has been favored since the time T-Rex ruled supreme (the dinosaur, not the band)." And of course, "Gold is going up because our fiat money is being debased and rational people are doing the only thing that makes any sense by buying yellow metal."

One commenter, for instance, posited: "Gold is trading as a currency. Yes it could be somewhat overvalued today, and may fall back, but in 12 months it will be up against all fiat currencies that are clearly being devalued."

But here's the problem: If gold is acting like a currency, it's acting like a really, really bad one.

In my article last week, I provided a plethora of charts showing how gold's price action has stacked up against a variety of actual goods including milk, cotton, and pork. If gold were truly acting as a currency and reacting simply to the paper currency being injected into the system, gold's price would simply track the price of things that people actually buy -- like milk, cotton, and pork -- as everything simultaneously rose drastically in dollar terms.

This would make perfect sense to me, because as the perfect currency, I should be able to expect that an ounce of gold today will buy roughly the same amount of pork that an ounce of gold did back in 2000. But that's not nearly the case. In 2000, an ounce of gold would have bought you 108 pounds of pork. Today, it will buy you 535 pounds. That's a happy outcome for someone who has gold and loves bacon, but it doesn't make for a good currency.

Many of the people who would argue for gold as our actual currency contend that it would fight the financial ill of inflation. That's a fair point, and it seems to do that in spades. However, just as rapid inflation can cause serious economic problems, rapid deflation can cause major problems of its own.

In a deflationary environment, the pork farmer selling all of that bacon above would have to consider lowering his prices year after year. Why? Because if the price of everything else is falling in gold terms, he's going to have to keep his prices in line or risk having overpriced meat products that are getting smelly as they sit unsold in his warehouse. More notably, large pork farms will have to continually renegotiate labor and other supply contracts down since the product they're selling is continually falling to a lower price. The Austrian School of Economics -- which is often behind the calls for gold as a currency -- is noted for its focus on the role of human psychology in markets, so surely it would understand the psychological friction involved in continual downward contract renegotiations.

The ant and the grasshopper revisited
Of course the group that really benefits in the "gold as currency" scenario is the savers in the economy. You're a pretty happy camper if the (gold) currency that you're stuffing under your mattress is increasing in relative value year after year. That's in stark contrast to the current reality where inflation -- no matter how low it is -- continually eats away at the value of your cash.

On the flip side in this world of gold currency, debtors would be in terrible shape. In a deflationary environment, the value of the principal that they owe would be constantly increasing on top of whatever interest they're paying for the use of that capital.

"Fantastic!" gold proponents are likely to say. "That's just how it should be -- savers are rewarded and debtors are punished. We currently do things the opposite way, and look where it's gotten us."

That's a pretty attractive viewpoint because it seems to make logical sense. But here's the problem: A savings-oriented culture where people are scared to borrow is the enemy of a growing economy. When your economy is rewarding the Scrooge McDucks of the world who are perfectly content hoarding their gold coins in a giant vault where they can take afternoon swims, while causing gung-ho entrepreneurs to wet their pants at the thought of taking on debt to expand their small business, you've got problems. Unless, of course, you don't really care about economic growth.

It's pretty easy to look at the unemployment rate, the terrible performance of the Dow Jones (INDEX: ^DJI) and other market indexes over the past decade, and the sluggish economic growth and conclude that something drastic needs to change. I think that's true, but I think that change needs to come in the form of better education and training, less political rancor, and a willingness to find common-sense solutions to big problems like Social Security and Medicare.

But dumping the dollar in favor of gold? Count me out.

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  • Report this Comment On September 20, 2011, at 1:17 PM, imnotsleeping2 wrote:

    Forget gold, Spam should be our currency

  • Report this Comment On September 20, 2011, at 1:35 PM, platinum321 wrote:

    Gold is not a currency gold is real money!

  • Report this Comment On September 20, 2011, at 4:03 PM, ihtfp92 wrote:

    The US could issue metals based certificates of deposit (just like it did 100 years ago) not as a replacement for our fiat currency, but as a stabilizer.

    Imagine G-dollars, defined as 20mg of pure gold (today about $1.30), issued by the US Mint and exchangeable upon demand for the metal itself. They would float in value next to the fiat currency and could be used in private contracts.

    Given the holdings in Fort Knox and the Federal Reserve Bank of New York (~375 million troy oz.) we could issue about 1/2 trillion G$. In comparison the conventional dollar money supply (M1, cash) is about 2.1 trillion, and M2 (cash + bank deposits) is about 9.5 trillion.

    Could a parallel currency like this stabilize our fiat currency, or would it make things worse?

  • Report this Comment On September 20, 2011, at 4:50 PM, formionas wrote:

    FED keeps printing and printing money. The dolar, euro, sterling etc are devaluated because of this. Thats whu gold and silver will skyrocket.

  • Report this Comment On September 20, 2011, at 6:00 PM, Retirefunds wrote:

    Your reference to pork vs gold is not a proper one. Pork prices have dived for over two years now due to over supply etc.

    Your "deflationary" scenario is also faulty. Why would this be a problem. One who "owes" an oz of gold would repay it in kind, in addition to a percentage, lets say 5% of an oz.

    If something is indeed "currency" then that is the curency used. You seem to have injected a fiat currency into the equation.

  • Report this Comment On September 20, 2011, at 6:51 PM, dbtheonly wrote:

    Retirefunds,

    Massive deflation is a problem as the price of "stuff" in terms of gold is dropping because more "stuff" is being made than gold mined. Farmers would receive less for their crops. Merchants would constantly lose profit margin. Manufacturers would face ever decreasing prices for their goods. Workers will face ever decreasing pay or risk losing jobs entirely as Businesses fail to make money

    No one would borrow to buy or invest in anything since the price will be cheaper tomorrow. There would be a "race to the bottom" in prices and wages.

    It happened. Look at the history of the US from say 1800 to 1930.

    Gold currency is subject to shorttages as the bank notes of the late 1800s show.

    Gold currency does not allow a nation to respond to emergencies. Such as WWI. Now some assert that WWI was caused by a conspiracy designed to seize control of the governments. I assert that the only reason Belgium was in the war was because they were invaded by the Germans. No conspiracy. Just an emergency. Even the US abandoned a gold currency during the Civil War.

  • Report this Comment On September 20, 2011, at 9:49 PM, ozjon69 wrote:

    "Unless, of course, you don't really care about economic growth."

    Maybe, pursuit of growth is the catalyst for some/many of our economic problems?

    Why do we pursue it so vigorously?

    Is it really desirable/necessary?

    What's wrong with the concept of well run business producing steady returns, year after year, without expanding?

  • Report this Comment On September 20, 2011, at 10:27 PM, TMFKopp wrote:

    @dbtheonly

    Perfect. Couldn't have said it better myself.

    Matt

  • Report this Comment On September 21, 2011, at 1:58 AM, reflector wrote:

    ozjon69,

    well put!

    the world is exhausting its resources, and overpopulation is becoming an issue.

    this notion of "growth" at all costs is indeed a sickness that we must, as a society, disabuse ourselves of.

    in a biological entity, rampant growth has a name, it is called cancer.

    matt,

    a decent article, but getting back to the growth issue, you write:

    "A savings-oriented culture where people are scared to borrow is the enemy of a growing economy. "

    growth is not the end-all.

    why can't we be happy with a stable, balanced existence?

    in america we have this sick gluttony where we think more, more, MORE!

    in a savings oriented culture, reckless borrowing would be discouraged, as it should be, no liars loans, etc, that doesn't mean no loans at all. just do it responsibly.

  • Report this Comment On September 21, 2011, at 6:02 AM, dbtheonly wrote:

    truthisntstupid,

    I don't think the "gold bugs" are stupid. I think if you view the issue as one of politics rather than economics; it makes perfect sense. They're in a closed system and that system makes sense as long as you view the goals to be accomplished.

    BTW thank you for your advice on other threads. I'm no economist.

    Matt,

    Thank you.

    I'm confused by the arguments above against growth. We're here to learn to grow our investments. Does ozjon look forward to a raise in pay? While I'd certainly be the first to endorse reflector's idea of a balanced, stable, contented existence, the fact remains that there are more humans every day & without growth in the economy; the overall quality of life will drop.

    I am greedy enough to want a better life for my children. But yes, at the same time I don't want to live "in that counting house where nothing counts but more."

  • Report this Comment On September 21, 2011, at 7:45 AM, dbjella wrote:

    dbtheonly

    Do you think we could experience growth with stable money? If I got the same wage, but prices went down to efficiencies am I not better off?

    To me the opposite is happening especially for me :( as my wage is stagnant, but prices are slowly rising especially for food. I have to cut out something.

    I am just not sure of a policy of slightly rising prices is that great for everyone, but I what do I know.

  • Report this Comment On September 21, 2011, at 7:45 AM, dbjella wrote:

    went down due to efficiences

  • Report this Comment On September 21, 2011, at 10:25 AM, dbtheonly wrote:

    dbjella,

    A stable money supply is exactly the goal. It question is rather what is the definition of "stable" and how does one achieve it. I would contend (and ask for help from truthisntstupid if I get too far out of the historical field) that a money supply in rough balance with the amount of goods and services to be consumed is the target. Not a money supply chained to any specific, but finite, substance.

    When one has too much "money" and too little "stuff" rampant inflation occurs and that's bad. The Continental Congress, the French 1st Republic, and Weimar Germany all learned this lesson the hard way.

    Equally though, the Panics of 1873 & 1893, as well as the Great Depression, show us the problems of too much "stuff" & not enough "money". Massive deflation is bad too.

  • Report this Comment On September 21, 2011, at 10:28 AM, whereaminow wrote:

    ---------->A savings-oriented culture where people are scared to borrow is the enemy of a growing economy.<----------

    How did you get from A to B here? Savings lengthens the structure of production. In itself, savings is the only way to grow the economy in a sustainable fashion.

    You can grow an economy through a printing press, but it will be bubbles and busts. In fact, every bubble in history, including the tulip bubble, can be traced to a rapid increase in the supply of money (bank notes.)

    ------>The Austrian School of Economics -- which is often behind the calls for gold as a currency -- is noted for its focus on the role of human psychology in markets, so surely it would understand the psychological friction involved in continual downward contract renegotiations.<-----

    And they do. But it's hard to understand why anticipating falling prices is so traumatic, but anticipating higher prices is not? Every one, even the farmer, has costs of production as well as prices for sale. Rising prices hurt farmers as well. In every business, the person that correctly anticipates future price movements, up or down, will benefit.

    Of course, in America, after 90 years of rampant currency debasement, people think that prices can only rise. So it's going to be difficult to adapt. No doubt.

    And competition in currency through private enterprise would be best.

    Enjoyed the post.

    David in Qatar

  • Report this Comment On September 21, 2011, at 10:41 AM, whereaminow wrote:

    ----->Equally though, the Panics of 1873 & 1893, as well as the Great Depression, show us the problems of too much "stuff" & not enough "money". Massive deflation is bad too. <-----

    How can you have massive deflation if the money supply had not already been massively increased? Hmmm....

    1873 was the aftermath of the issuance of the Greenback. The so-called "Long Depression" was brief and the recovery was the most robust in history. All economists admit that now. 1893 was the result of a foolish political idea to fix the ratio of gold to silver, called bimetallism.

    And the gold standard has absolutely nothing to do with the Great Depression. It was caused by World War I, massive currency debasement, including a huge increase in the supply of money in America from 1921-1929 through the newly created Federal Reserve, and the political policies of intervention of both Hoover and FDR. See "America's Great Depression" by Murray N. Rothbard for more details.

    David in Qatar

  • Report this Comment On September 21, 2011, at 12:48 PM, whereaminow wrote:

    I should add a little bit to this:

    ---------->A savings-oriented culture where people are scared to borrow is the enemy of a growing economy.<----------

    In addition to the fact that only through savings can a country grow sustainable wealth, savings (real savings) increases the supply of loanable funds. More money to be lent pushes down interest rates, making borrowing more attractive.

    People are scared to borrow today in an environment of funny money and debt that is radically different from an enviornment of honest money and prosperity. Perhaps near 0% interest rates are the heart of the problem and not the solution to mollify borrowers.

    David in Qatar

  • Report this Comment On September 21, 2011, at 1:05 PM, smartmuffin wrote:

    I'm not sure I understand what is to be gained by comparing gold to pork. Nobody exchanges gold for pork. The more accurate analysis would be that gold is gaining value against the dollar at a much higher rate than the dollar is losing value against pork.

    That being said, if the dollar was gone and gold was our only currency, deflation would not necessarily become a long-term problem. It would likely happen in the short term during the period of adjustment, but it seems odd to take what's happened over the last ten years with gold and extrapolate it to an environment where gold is the only currency.

  • Report this Comment On September 21, 2011, at 1:05 PM, plange01 wrote:

    if gold was only worth anywhere near what its selling for!

  • Report this Comment On September 21, 2011, at 1:46 PM, TheDumbMoney wrote:

    "And they do. But it's hard to understand why anticipating falling prices is so traumatic, but anticipating higher prices is not? Every one, even the farmer, has costs of production as well as prices for sale. Rising prices hurt farmers as well. In every business, the person that correctly anticipates future price movements, up or down, will benefit."

    How and why does anyone take on debt when deflation expectations exist? The answer is they don't.

    You can make whatever intellectual arguments you like, but from a technological, human health, and standard of living perspective, the past 100 years, and particularly the past 60, have been the most compelling and quickly-advancing in human history. This has all (absent the Great Depression, and moments during the last three years) come during times when people anticipated inflation, and were taking on debt. Debt mathematically increases the return on equity of a company. That is a fact. And debt mathematically increases the analogous return on a national level, too. Debt funded the creation of DARPA. Debt funds the initiation of the vast majority of small businesses. Can debt get out of hand? Yes. Did consumer debt in particular get out of hand in the last six years? Yes. But not all debt is bad. And not all debt is the same. As stated above, it is economically irrational to take on any debt (certainly any fixed rate debt) if you expect falling prices in the future. This leads not only to a temporary "dip" compression, but to an eternallly "return on equity" for companies, and to equivalently smaller economic growth for countries. Other sources of growth (demographics, inspiration/genius) exist for countries, just as other sources of growth (better business model, genius inventor, etc.) exist for companies, but debt is mathematically part of the ultimate growth equation. So yes, anticipating falling prices is vastly more traumatic than expecting moderately increasing prices.

    Also, your characterization of the Great Depression is wrong. The Fed shrank the money supply by about (I think) one half, after the stock market crash of 1929. The modern analogue would have been if the Fed, instead of doing the initial QE and QE2, had shrunk the base money supply by 1/2 starting in October 2008. Do you think that would have been a good idea? I'm sure you will say yes. Sadly, all we have is a non-existent counterfactual, but if the Fed had done that, I assert that we truly would be back at 1932, many more banks would no longer exist, many more small businesses would not exist either, and we would have 20%+ unemployment, not including underemployed and those who have given up looking.

    Enjoy your day, David. This is all I have time for today, but I welcome your inevitable reply explaining that I have it all wrong because I continue to assert that the ceiling is actually above my head.

  • Report this Comment On September 21, 2011, at 2:09 PM, TMFKopp wrote:

    @ozjon69 et al.

    The question of "why growth" is an interesting one to sit with. From a Zen perspective, I'd like to say, "Yes, let's be OK with what we have now and focus on being happier rather than materially richer." And I think there's definitely room for that.

    However, I think that misses a lot. For instance, as long as we have a growing population we have a need for more jobs for the people entering the workforce. That's not to mention the overabundance of workers we have at the present (as shown by the high unemployment).

    Additionally, while I could stand to be more content with the present state of my own circumstances, that's hardly the case for everyone in the country. Part of this is a wealth distribution issue, while part of it is a broader growth issue that would create more and better paying jobs for a wider range of people. I'm not about to step into the bear trap of wealth distribution on this thread, so I'll leave it at that.

    Additionally, it's through growth and innovation that we end up with new technologies that can save lives and improve lives. Paper records were the only way to go about keeping track of what was going on at a hospital for a long, long time, but the push for growth and a better way forward is bringing the more effective digital medical records closer to being reality -- a reality that could make medical care more effective and cheaper. Likewise, the push for growth has pharmaceutical companies looking for cures to cancer and a whole range of other diseases that could make very real and meaningful improvements to people's lives.

    So I think there's a balance. I won't disagree with the fact that our society could stand to be more mindful and grateful for what we currently have rather than being focused on how much happier we think we'll be with iPad 3. But I think we can build that attitude and appreciation along with a push forward to a better, richer, more technologically advanced tomorrow.

    Or maybe I'm just nuts.

    Matt

  • Report this Comment On September 21, 2011, at 2:36 PM, TMFKopp wrote:

    @David

    "---------->A savings-oriented culture where people are scared to borrow is the enemy of a growing economy.<----------

    "How did you get from A to B here? Savings lengthens the structure of production. In itself, savings is the only way to grow the economy in a sustainable fashion."

    Theory-wise you're right. Even with deflation there should be a market-clearing point where borrowers and savers meet.

    But finding that market clearing point is a matter of a) assuming that agents act rationally and b) what the damage to the real economy is during the process of finding that market-clearing point.

    I think some of the best contributions of Austrian thought are from the human psychology and motivation angle. There's also obviously a lot of that coming from the behavioral finance crowd. Some of the biggest failings of mainstream economics are the assumptions that agents act rationally -- which they often don't.

    So yeah, even if we're talking about drastic deflation there should still be a way for borrowing and lending to happen -- for instance a borrower might agree to borrow X ounces of gold and later pay back some amount lower than X which would provide the lender with an attractive real return and not be onerous to the borrower.

    But the question is whether human psychology allows this to happen smoothly. My contention is that it doesn't.

    As for:

    "it's hard to understand why anticipating falling prices is so traumatic, but anticipating higher prices is not? Every one, even the farmer, has costs of production as well as prices for sale. Rising prices hurt farmers as well. In every business, the person that correctly anticipates future price movements, up or down, will benefit."

    It's a similar matter. If agents are perfectly rational, it doesn't matter. Laborers on the farm and suppliers to the farm understand the deflationary environment and realize that though their pay is being cut, the value of what they're being paid is actually more. But the question isn't whether that works in theory, but whether it works in reality, and I believe that in reality the quirks of human psychology will mean that continual downward contract and price negotiations would lead to damaging economic friction.

    A system where you have rising prices and inflation may not be a perfect one, but from a psychological perspective, rising prices, if they're not rising excessively and are relatively predictable, can act as a grease as opposed to a gum in the economy's gears.

    Of course when we start getting into psychology like this it becomes much more of a gray area because simple graphs and even more complex equations (which the Austrians seem to largely despise anyway) don't do a good job picking up on human quirks.

    Matt

  • Report this Comment On September 21, 2011, at 3:07 PM, whereaminow wrote:

    Matt,

    I'm going to take this in pieces, cuz there is a lot, so I'll have to stretch it over a few comments.

    ---->But finding that market clearing point is a matter of a) assuming that agents act rationally and b) what the damage to the real economy is during the process of finding that market-clearing point.<------

    This is a really really big misconception that is out in the general public that needs to be corrected. When the Austrian School talks about rational human action, they only state that there is a "means-end" framework to individual's action. It doesn't mean that they fit the general definition of rational, i.e. not stupid. For an Austrian Economist, rational can be stupid, heated, poorly considered, etc. So in no way do they assume rational behavior as some kind of level playing field of knowledge or omnipotence or anything like that.

    Man acts with means to achieve ends to improve his satisfaction. That's it. Even in the absurd. Man uses axe (means) to kill wife (ends) for sleeping with his buddy because he is unsatisfied (to put it mildly.) Rational? By mainstream definition, no. By praxeological (human action) definition, absolutely. But both would agree that it's stupid.

    Now, as for the second part of the sentence. The market clearing point. What is that point? Can anyone ever know that in advance? Of course, the answer is no. At all times the market is moving to the market clearing point. It's going there right now. And now it's moving again. The market clearing point is the moment when demand (determined by the subjective value scales of market buyers for the good in relation to their available money) meets supply (which is determined by the subjective value scales of market sellers in relation to their demand for money.)

    That point cannot be known a priori. It is the fatal conceit inherent in maistream econ to believe they can determine this and plan prices and supply schedules for the economy. It's how we up with quasi governemnt power companies that get to use cost-plus pricing. This is a typical fallacy that arises from not understand the unknowable nature of the market clearing price.

    To think that this is damaging, nothing could be further from the truth. It is this market clearing process that makes our world so wonderful.

    David in Qatar

    David in Qatar

  • Report this Comment On September 21, 2011, at 3:13 PM, whereaminow wrote:

    So good I had to sign it twice ;)

  • Report this Comment On September 21, 2011, at 6:14 PM, hbofbyu wrote:

    I still subscribe to the notion that there is no free lunch. It's a law of physics, a law of the universe. Why wouldn't it apply to economics?

    Government intervention is just squeezing the balloon - either re-allocating from the haves to give to the have-nots or robbing the future to pay the present.

    Increasing the money supply obviously does not increase wealth - to the contrary it actually decreases wealth because the first recipients of the increased money supply (the bankers and brokers of Wall Street) benefit with their new found leverage and are able to outbid all those who are late recipients of the new money (with inflation the first buyer of goods pays less).

    The losers are the common worker and America's middle and lower classs who are the last to see their wages increase from the increased money supply. This weakens wealth formation undermines the rate of economic growth.

    From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.

    Banks provide liquidity, they grease the skids, they keep money moving, they provide a service. But they don't create anything tangible and we seem to be blind to their costs on society and on business. To quote the Financial Times, "$4,000bn (4 Trillion) of losses in US mortgage-related securities are just the surface of the story. Beneath those losses are real economic costs due to wasted resources: mortgage mis-pricing led the US to build far too many houses. Similar pricing errors in the telecoms bubble a decade ago led to millions of miles of unused fibre-optic cable being laid. The misused resources and the output foregone due to the recession are still part of the calculation of how (in)efficient our financial system is. What has somehow escaped attention is the cost of running the system." Not including the multimillion dollar salaries and bonuses they skim off our economy.

    Not to make anyone feel guilty, but we also don't create wealth sitting at a computer all day trading stocks - figuring out ways to legitimately game a system on 2 and 3 cent price swings.

    I am not a socialist and I don't have the remedy but the downfall of this country will be the ever increasing disparity we are creating between the rich and the poor. But that's a discussion for another day.

  • Report this Comment On September 21, 2011, at 7:38 PM, whereaminow wrote:

    Matt,

    I guess there's only one other part that I want to address.

    ----->It's a similar matter. If agents are perfectly rational, it doesn't matter. Laborers on the farm and suppliers to the farm understand the deflationary environment and realize that though their pay is being cut, the value of what they're being paid is actually more. But the question isn't whether that works in theory, but whether it works in reality, and I believe that in reality the quirks of human psychology will mean that continual downward contract and price negotiations would lead to damaging economic friction.

    A system where you have rising prices and inflation may not be a perfect one, but from a psychological perspective, rising prices, if they're not rising excessively and are relatively predictable, can act as a grease as opposed to a gum in the economy's gears.<-----

    I agree that this is a problem, but let us be frank about what caused the problem. Firstly, let's sketch out the problem itself. For decades prices have been rising for things people need (food, energy) and in response, people have fought for higher and higher wages. This makes collectivization of labor attractive (in fact, it's the ONLY reason to join a union in a market economy.) It becomes popular politics to pander to the working man, by promising to raise his level of wage to keep up with the costs. This is a self fulfilling prophecy, since the only way to keep this up is to keep the inflation going, raising costs once again, and around and around we go!

    =D

    Is this really the best we can do? We fight for higher wages (union or not) to keep up with rising prices, only to have more inflation, more price rises, and more fighting for higher wages. That's the culture of America. That's not a healthy culture. It's a poisonous one.

    So you are right, that today, where we stand right now, it is very difficult for people to understand a world where prices are falling a percent or two a year. This is a world, like the 1800s where prices fall in half over the course of their lifetime while their wages remain the same. This meant that a person did not have to speculate his way to a comfortable retirement. He merely needed to save a little and that savings became more powerful as time went on. He could, of couse, still invest in other ways. The idea of a social safety net was the necessity of barbarians, not of a prosperous society with sound money.

    In other words, you can trace many of our biggest political problems to bad money (and I haven't even touched on America's lust for war.) The psychology has taken hold, but it is not human nature, intrinsically, to expect and plan for higher prices. And i don't think it would take long (perhaps a few years or a decade) to build the trust that sound money brings with it.

    David in Qatar

  • Report this Comment On September 22, 2011, at 7:15 AM, dbtheonly wrote:

    Dave in Qatar,

    "1873 was the aftermath of the issuance of the Greenback."

    So you're saying that the contraction in money supply, by withdrawing the greenbacks from circulation, caused the Panic. Too little "money" chasing too much "stuff". Okay.

    Murray Rothbard lost me when he wrote "It governs best which governs not at all". Years ago he was the philosopher of the Libertarian/anarchist movement. Read one of his books. Was unimpressed.

    And just for it, had the Hoover Depression been due to an inflation of the money supply, it would have been an inflationary one. Prices skyrocketing & such.Too much "money" chasing too little "stuff". Instead you have the AAA (not the automobile club) reducing farm output by destroying milk & killing hogs. You have the NRA (not the gun nuts) promising not to discount prices. Not an inflationary Depression therefore not too much money. Perhaps another reason to be unimpressed by Rothbard?

  • Report this Comment On September 22, 2011, at 11:11 AM, whereaminow wrote:

    db,

    Cause and effect.

    The Greenback was an intervention in the market, not the market's money. it's purpose was to allow the gov to pay off its war debts in the least painful way (for them.) The economic dislocations caused by its issuance were entirely predictable (and were predicted by hard money commentators of that era.) Note too, that this so-called crash is now universally agreed to have been very brief (6-9 months) and the recovery was the most robust decade in American economic history.

    So yeah, 1873 is old news and the Long Depression is a myth.

    As for the Great Depression, the evidence is right there if you'd like to look it up. I don't know if it is possible for me to care less for your opinion of the greatest economic historian in world history, Murray Rothbard. Staring at price levels gets you nowhere. You, nor I, nor anyone can know a priori what the price level should be. All we do know is that under a gold standard, prices will fall because the economy produces more goods than money. Since prices did not fall, but in fact rose slightly during the highly productive era from 1921-1929, we already see a problem. Upon closer inspection we see that the money supply grew dramatically.

    But that's not all. We also have the actions and words of Federal Reserve officials during that period, particularly those of Benjamin Strong who colluded with the Bank of England in 1926 to produce even more inflation to aid England's flawed gold standard peg (they tried to re-peg at pre-war ratio, very stupid.)

    And finally, we have Fed actions and words in 1929, when they came to the terrified realization that they had created a huge speculative bubble, then drastically slowed money supply growth, prompting a terrible crash.

    As for Hoover, his "laissez faire" credentials are a complete myth that no serious historian could even consider. He was a born interventionist and proud of it. He ignored the advice of Mellon, who urged liquidation of malinvestment, instituted the first New Deal, which FDR admitted laid the ground work for his scheming. Hoover spent his life bragging about all that he had done to intervene.

    Yet, in every crash that preceeded 1929 (and 1920 was actually worse in terms of GNP and unemployment), the economy recovered in months without any intervention at all. How is that possible?

    David in Qatar

  • Report this Comment On September 23, 2011, at 7:09 AM, dbtheonly wrote:

    Dave,

    "I don't know if it is possible for me to care less for your opinion of the greatest economic historian in world history, Murray Rothbard".

    Don't hold back, tell us how you really feel. Another face on Mt. Rushmore perhaps?

    And I'm still looking for that massive inflation from 1929 to 1937.

  • Report this Comment On September 23, 2011, at 3:55 PM, whereaminow wrote:

    dbtheonly,

    You were just owned, massively. And this is all you can pick at? Clown.

    Boom leads to Bust. That's what 1929-1937 is, the bust part, clown. And it wasn't exactly inflation free, as the dollar was devalued over 60% in 1933.

    David in Qatar

  • Report this Comment On September 23, 2011, at 8:18 PM, Vells77 wrote:

    Stable money is very good. In fact growth that occurs while the money supply is stable is 'real' growth. As production increases it means that my ounce of gold can buy more. That's it, an increase in money supply does not mean increased growth. The USA has been experiencing this 'phantom growth' for years otherwise known as 'jobless growth', based on an expansion in the money supply!!!

    Message from Africa

  • Report this Comment On September 23, 2011, at 10:39 PM, ozjon69 wrote:

    dbtheonly,

    "Does ozjon look forward to a raise in pay?" (in my case return-on investments, since I'm a retiree) ..... No!

    Maintenance of my present (or at least pre 2008) modest "first-world" living standard would suit me fine.

    In that, I (and my children/grandchildren) are among the world's fortunate.

    We are doing OK and don't really need more and more and more.

    Redistribution of the world's wealth between the rich and desperately poor is a question for another day and another forum.

    Of course, I'm playing the "grow your investment" game with MF advice too - it's the only game in town if I want to get my capital back up to pre 2008 level and preserve it and my lifestyle.

    ------------------

    In my post I, questioned the need/desirability of continual pursuit of economic growth (as the subject was raised in the original article).

    I can see the need to increase economic output to match population growth and living standards for the world's poor, but in the first-world, do we really need further massive growth and consumption of resources?

    It seems to me that striving for efficiency, less waste, better use of scarce resources and preserving the planet are better aims.

  • Report this Comment On September 23, 2011, at 11:11 PM, ozjon69 wrote:

    and, of course, stability

  • Report this Comment On September 24, 2011, at 6:25 PM, daleinaz wrote:

    I work in the electronics industry. The prices of our products (and the cost of our components) has been falling consistently year after year. In fact many of our customers write a required 3% to 5% annual price decrease into the contract. Sounds like deflation to me. And yet somehow our industry has not only survived but thrived.

    Remember the original IBM PC, with it's 5Mhz CPU and 1/2 Mbyte of RAM? And two floppy drives? It cost about $3000 in 1982 dollars. Today you can buy a PC with a CPU that is >1000x faster, more than 1000x as much memory, and a 1Tbyte (that's a million megabytes, by the way) hard drive, for well under $1000 in 2011 dollars.

    What we need in monetary policy is predictability more than anything else. We can live with a zero inflation rate, a small negative inflation rate, or even a relatively high inflation rate, as long as we can anticipate that the rate will remain essentially the same for the next ten years.

    Sadly, with the huge increases in the money supply that we have had over the past two years, we will see rapid increases in prices over the next five years. One reason the money supply has been increased so much is to try to keep home prices from falling any more, leading to even more "jingle mail" as underwater homeowners walk away from their homes and hand them back to the banks.

  • Report this Comment On September 25, 2011, at 12:08 PM, XMFSinchiruna wrote:

    Matt,

    I have just one point to add here. There is a major structural divide (and therefore a leap of logic) between gold's current currency role and a hypothetical where gold is tied to the official currency of the land ... which is the scene you seem to be painting for us here. If gold were the official currency of the land here in the U.S., or more precisely its value to the official currency were pegged as it was pre-1971, then the price of gold would not have been rising as it has been. Moreover, had gold retained its peg to the official currency of the land, there is every likelihood we would not be facing the global debt/currency crisis that is currently driving gold's rise. By superimposing gold's rapid ascent over a backdrop where gold is the official currency, you seek to overlay two realities that are fundamentally incongruent and in all likelihood mutually exclusive.

    For a more salient context within which to assess the viability of an official monetary role for gold within a global currency regime, you will be better served looking at price dynamics and in the period between the Gold Reserve Act of 1934 and the Nixon shock in 1971 that removed the dollar peg to gold. The way I see it, a gold standard does not inhibit the proper functioning of credit; it inhibits the accrual of debt beyond one's reasonable ability to repay. I believe it would constrain only that portion of economic growth that is predicated upon unsustainable fiscal policy and economic structure.

    The article makes for a fun mental exercise, but the result does not strike me as an effective argument against a viable role for gold within a revised global monetary regime. I usually tend toward being rather agnostic on the gold standard issue, focusing instead upon my current investment thesis for gold within the existing currency regime. But to construct a convincing argument against gold's viability for that role, the present bull market does not offer a proper logical foundation.

  • Report this Comment On September 27, 2011, at 11:57 AM, JohnnyMojo wrote:

    I have a few questions for the folks here.

    For the Gold bugs, (whom I tend to lean closer to, but nothing like my dad, who doesn't see some of the pitfalls in the equaton as I do.): How do you explain away the trade imbalance, and under a gold standard, how do you purport we keep from going entirely broke at warp speed, if we're sending a hundred billion "dollars" in gold each month to China and the Middle East? Even assuming under a gold standard both gold and silver were considered money at a fixed ratio with one another, it would just be a matter of time before we ran out of both.....

    For the Gold Standard naysayers; Assuming there was a satisfactory answer for my first question, and that we either got the trade imbalance under control or found some other economic means to fix it, then what about this? The government co-opts ownership all the country's big gold miners, and cuts off leasing out US lands to foreigh countries to mind for gold, with a grandfather clause for existing contracts. It pays the shareholders and citizens a 25% premium for every share of every Gold (& Silver) mining company, and begins a new system under which the talent is kept in place and the companies are now viewed as entities whose existence for being is to continue to inflate what would now pass for the M1. In addition, they would also continue to aggressively pursue gold & silver mining properties and contracts the world over, just as the companies likely would have done themselves otherwise. Assuming that after the initial chaos and name calling and cries of "Communist! Fascist! Socialist! Big Brother!" died down, and this mode of expanding the money supply kicked into full gear, then, just guessing, but in a back of the envelope estimate, going by my knowledge of the main components of the gold mining indexes, we as a country would probably add another 20 million ounces of gold a year, at least for the forseeable future, and a quarter billion ounces of silver a year to the "national pot." We would requre that other countries pay debts in kind, and since our currency would boiuce against other countries exchange rates for gold and silver, traded as commodities, a country couldn't get away with inflating their way to cheap gold from us, since they would debase their currency simultaneously against ours by doing so.

    There would probably need to be a new sort of standard for borrowing. First off, in light of the money supply only expanding by maybe 2% or 3% a year, it would require fiscal solvency. If we needed to borrow on a massive scale, we could do so from our own citizens against future gold and silver production. We'd have to spend a long time buying up all the gold to add to Fort Knox and the NY Federal Reserve supplies, then peg the initial exchange rate so that it pegged the theoretical price of gold as a starting point, so that nobody holding debt or savings would get screwed. It'd probably be about $20,000 an ounce as a starting point. It would seem obscene based on conventional wisdom, but this would hardly be a conventional situation.

    We'd have to think twice about jumping into a war costing us current-dollar-equivalence to 100 Billion, yearly, as that would represent 1/4 to 1/2 of all the gold produced and added to the government pot in 1 year, at 5 million ounces.

    But the point is,with this policy of increasing money supply, deflation would not be the defacto guarantee. Rather, with our growing population, loans between 0 and 2% interest, with the population partially offsetting the increase in money would probably be seen as normal.

    Market speculation would still be possible with leverage contracts, but people might think twice before leverageing themselves a hundred-fold, since, a 2% return, and having any savings at all would very much represent a good investment...

    In short my question is, aside from the fact that it would terrify many people having to relearn economics 101 all together, since economics 101 would be an entirely different class, my question for the non gold bugs is; What about this scenario would not work or doom us to failure? Anything? Is it fear and revulsion at change that creates the disdain for the gold standard argument, or is it hard economic sense?

    Sorry about the length of this post.

    ~~Johnny Mo~~

  • Report this Comment On September 27, 2011, at 3:15 PM, dbtheonly wrote:

    Truth,

    Do you remember what I said about the "gold Bugs" being in their own closed world? I think Dave has just proved it. Rothbard said it; therefore it is true. Any and all evidence to the contrary can be explained or defined away. He "owns" me. Yep. I'm quaking in my Bunny Slippers.

    I will not bore you with my pick for greatest political philosopher of all time other than to state he was Marsilius of Padua & lived in the 13th Century.

    ozjon,

    "It seems to me that striving for efficiency, less waste, better use of scarce resources and preserving the planet are better aims". Indeed, & if you allow me to define "growth" as anything other than "bigger", we are in full agreement.

  • Report this Comment On September 27, 2011, at 6:09 PM, krazycanuck wrote:

    "In 2000, an ounce of gold would have bought you 108 pounds of pork. Today, it will buy you 535 pounds. That's a happy outcome for someone who has gold and loves bacon, but it doesn't make for a good currency" --Matt Koppenheffer

    Which statistics did you use: The Bureau, or Shadowstats?

  • Report this Comment On September 28, 2011, at 7:50 PM, whereaminow wrote:

    @ Johnny Mojo,

    "For the Gold bugs, (whom I tend to lean closer to, but nothing like my dad, who doesn't see some of the pitfalls in the equaton as I do.): How do you explain away the trade imbalance, and under a gold standard, how do you purport we keep from going entirely broke at warp speed, if we're sending a hundred billion "dollars" in gold each month to China and the Middle East? Even assuming under a gold standard both gold and silver were considered money at a fixed ratio with one another, it would just be a matter of time before we ran out of both....."

    I'm going to have to assume that you are referring to China's ability to make a cheaper product? Or perhaps you are referring to the constant borrowing from the Chinese by the American government?

    The latter is easily handled. Under a gold standard, the government has no easy way to pay its debts and is therefore severly hampered in their creation. I think you can immediately see why governments hate the gold standard, hate everyone who promotes the gold standard, and does everything possible to marginalize people who promote the gold standard. Easy stuff.

    As for the former, the market clears. If Americans are sending gold over to China to buy bad food and bad products, that leaves fewer ounces of gold in America to buy American goods. That depresses the prices of American goods, providing natural incentive to buy American. No need for cheesy nationalist propaganda slogans like "Buy American" and all that other cultish statist nonsense.

    If Americans continue to buy bad Chinese garbage even after prices for quality American products fall, one might have to wonder if American business owners should keep their jobs after all. Perhaps they should go bankrupt and allow a new crop of innovative entrepreneurs to take over. But let's assume they are doing their best. With a low amount of available money (since it's all going to China), interest rates would rise, making savings more attractive. How high would they have to go? No one can know the market clearing point in advance, but lets' say rates on 10 year CD's rises to 15%. What would you do, then?

    Savings, of course, is the natural way to wealth creation afterall. So this lack of consumption on American products would actually force Americans to save money, which could then be used as investment for things Americans actually need.

    But these processes work out over time, and one thing that all statists hate is time. They want quick fixes and solutions that can be implemented now. Look at TMFKopp, he's in a tizzy because bacon looks cheap relative to gold. Who cares? The market will clear. (And he doesn't even understand that the volatility is in the dollar, not the meats or the metals. Oh well......)

    David in Qatar

  • Report this Comment On September 28, 2011, at 7:52 PM, whereaminow wrote:

    Also, Johnny, you never ever want to fix the ratio of gold to silver. That is a political trick called bimetallism that was instituted to disasterous effect in the 1890s and caused the Panic of 1893. The market determines the value of economic goods. Political tricks simply cause distortions.

    David in Qatar

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